|In today’s Monetary Policy Report (MPR), the Bank boosted their forecast of Canada’s economy this year to 2.6 percent from 2.1 percent in the January MPR. For 2018, growth is now projected to be 1.9 percent (slightly below the January forecast). However, the Bank suggested that the “composition of aggregate demand is uneven.” According to today’s MPR, “In the oil and gas sector, a resumption of growth in investment spending is under way in the wake of significant adjustments to past declines in commodity prices. This contributed, together with very strong consumption and residential investment, to a temporary surge in growth in the first quarter. In contrast, non-commodity business investment and exports remain weak, raising questions about the medium-term sustainability of the upturn”.
“Economic activity will be supported by rising foreign demand, federal fiscal stimulus and accommodative monetary and financial conditions. In addition, the composition of demand growth is expected to broaden: the pace of household expenditures, especially residential investment, moderates as the contributions from exports and business investment increase, albeit at a much slower pace than would normally be expected at this stage of the cycle. Ongoing competitiveness challenges and uncertainty surrounding the prospects for global trade are expected to limit this broadening of growth. A notable increase in global protectionism remains the most important source of uncertainty facing the Canadian economy”.
The Bank’s forecast remains a bit below the consensus view of Bay Street economists. The Bank has underestimated growth for many quarters. The MPR suggests that “while the degree of excess capacity has declined since the January Report, the Bank judges that in the first quarter of 2017 it remains material, between 1 1/4 and 1/4 per cent”. The output gap is now projected to close in the first half of 2018, a bit sooner than the Bank anticipated in January.