According to analysts at Royal Bank of Canada, with interest rates moving higher in 2019, affordability will continue to deteriorate, stifling both sales and prices for the Canadian economy.
Key Quotes
“Against the backdrop of an elevated level of job vacancies, we expect wage growth will accelerate in 2019 as employers compete for increasingly scarce labour.”
“Unlike the clear path for the US Federal Reserve in 2019, the timing of the next Bank of Canada rate hike is being complicated by developments in the oil patch. Transportation bottlenecks and refinery shutdowns left Canadian producers significantly oversupplied, pressuring prices lower and leading the Alberta government to mandate production cuts in that province. These cuts are expected to bring inventories back to more normal levels but at the cost of economic growth in Alberta and to a lesser extent, the overall economy. We shaved the forecast for Alberta by about 1 ppt to 1.5% in 2019, and estimate this will lower national GDP growth by 0.1 to 0.2 ppt.
“At 1.7%, Canada’s economy will be running just shy of its potential which is unlikely to have a material impact on core inflation or the labour market. However with the economy hitting a soft patch, the Bank of Canada is likely to delay the next rate hike until the second quarter of next year. As oil prices recover the weight on the economy will lift, clearing the way for the Bank to resume its plan to return the policy rate closer to neutral. Our forecast assumes the Bank of Canada will raise the overnight rate to 2.25% in 2019.”
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