October 20, 2010
Data Release: Bank of Canada takes more dovish stance on economic outlook
* The Bank of Canada (BoC) has downgraded its global and Canadian economic
growth outlook for a second straight Monetary Policy Report (MPR), revising
their Canadian economic growth forecast by an average of 0.5 percentage
points in 2010 and 2011. The BoC forecasts economic growth to be 3.0% in
2010, 2.3% in 2011, and 2.6% in 2012.
* The downward revision to the outlook is largely a reflection of
international and currency developments. The BoC predicts that passing the
economic baton to private demand in the U.S. and other advanced nations
might prove to be a more daunting task than it had originally expected,
especially as these countries are plagued with high unemployment and a
continued need to restore household and government balance sheets. The BoC
has further outlined the volatility in currency markets and tensions related
to global imbalances as a downside risk to the global recovery.
* But the concerns are not just international in nature. The most
interesting change to the BoC's Canadian economic outlook was the downward
revision to components related to domestic demand. The BoC has outlined the
level of Canadian household debt as a major risk to the Canadian economic
outlook, and anticipates that high debt levels will constrain growth in
household expenditures throughout the forecast horizon. In fact, the BoC
forecasts for consumer spending growth to contribute just 1.2 percentage
points to economic growth in 2011 and 2012. That is consistent with tepid
consumer spending growth of 1.8-2.0%. Meanwhile, also related to the level
of household debt, residential investment is expected to drag on growth in
each of those years.
* The BoC's real GDP forecast is consistent with an output gap that closes
at the end of 2012 - a year later than estimated in July's MPR.
* Largely in line with slower economic growth and a more gradual uptick in
economic slack, the BoC has made a downward revision of about 0.2 percentage
points to its core inflation outlook from Q3/2010 to Q1/2012. Core inflation
is expected to moderate from its current rate of 1.6% to 1.5% by early 2011,
and then gradually rise to 2.0% by 2012.
* The downgrade to the BoC's economic forecast is not surprising. And, in
fact, the more dovish stance on the global economic outlook, in the U.S. in
particular, is more consistent with advanced nations digging their way out
of a synchronized financial crisis, than July's more optimistic forecast.
* The BoC's economic outlook is largely consistent with our forecast for
Canadian economic growth, although we are slightly more pessimistic on
growth in 2011, when we expect Canadian real GDP
growth of 2.0%. We see some downside room with core inflation in the
near-term, with a bottom at 1.3% in the Q1/2011.
* The BoC has raised the issue of household debt as a risk to the outlook.
The level of household debt has been on its radar for some time now. It is
our view that Canadian debt levels have become slightly excessive. For now,
the strength in Canadian domestic demand has started to unwind. The BoC's
consumption and residential investment forecast is consistent with a
significantly lower rate of household borrowing. The risk remains that,
given sustained low interest rates, domestic credit demand may
re-accelerate, becoming an even larger issue down the road. Under this
situation, monetary policy may not be the best tool to curb borrowing,
particularly at a time when the economy is fragile. Rather, regulatory
changes may be a more appropriate channel for prudential action.
* We note that the BoC's outlook represents the slowest recovery on record
for the Canadian economy, providing justification for rates to remain
stimulative through 2011.
* Putting it all together, we anticipate that the BoC will remain on hold
until March of next year. As the global recovery solidifies, the BoC will
want to resume lifting rates off emergency levels. We believe that BoC will
proceed with gradual rate hikes through 2011 and 2012, bringing the
overnight rate to 2.00% and 3.00% at the end of each respective year.
I hope this finds you Happy and Healthy!
All the Best!
A. Mark Argentino
P. Eng. Broker
Specializing in Residential & Investment Real Estate
RE/MAX Realty Specialists Inc.
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