Canadian Quarterly Economic Forecast
- After flying high in the first half of the year, real GDP growth is slowly coming back down to earth. A 3.0% expansion in 2017 is expected to be followed by an above-trend 2.4% pace in 2018. We don’t expect the economy to settle into a trend pace until 2019.
- Rising interest rates, elevated indebtedness and macroprudential measures will conspire to moderate residential investment and consumer spending, gradually nudging the economy back towards its long-term cruising speed.
- The Bank of Canada will remain in ‘intense data dependent mode’ that requires confirmation of ongoing inflationary pressures to support further rate hikes. Our forecast sees the Bank’s key criteria being met, bringing the overnight rate to 1.5% by end-2018.
The breakneck 4% (annualized) pace of growth in the first half of this year could not last forever, so there’s no reason to be alarmed that it gave way to 1.7% (annualized) in the third quarter. A number of one-off shocks negatively affected activity in that quarter, including hurricanes in the U.S. that hit demand for Canadian oil and larger-than-usual maintenance shutdowns. Together, these shaved about 0.6 percentage points from real GDP growth. Putting aside recent noisy signals, Canada’s underlying economy remains a picture of health. This fact can be seen by a surge in full-time jobs that pushed the unemployment rate to 5.9% and supports domestic demand growth at 4% throughout the year.
If the start of the year featured growth that was too hot, the medium-term outlook is likely to please Goldilocks. In the coming quarters, we are projecting growth to moderate, but remain sufficient to generate gradual upward pressure on inflation and interest rates (Chart 1). The outlook is supported by ongoing job and income gains – enough to backstop solid consumer spending growth in 2018 even in the face of elevated household debt. Assuming no major trade disruptions (a key downside risk), the Canadian economy should benefit from healthy U.S. and global demand, as well as a gradual recovery in business investment and continued government spending.