Canada Data Preview:July GDP Slows But 3Q To Beat BOC's Fcast

By Yali N'Diaye

     OTTAWA (MNI) - Canada's economy is expected to slow down in July, but

should still post an above-potential performance in the third quarter, according

to analysts, beating the Bank of Canada's 2.0% projection, leaving the door open

for a third rate hike either in October or in December.

     Analysts in a MNI survey expect July GDP to edge up 0.1% after growing 0.3%

in June and 4.5% in the second quarter, far outpacing the BOC's annualized 3.0%

forecast for the quarter.

     A 2.1% gain in real wholesale sales, a 0.6% increase in hours worked and

solid housing starts in July (221,974 at a seasonally adjusted annual rate after

212,506 in June) should help GDP growth stay in positive territory for the ninth

consecutive month despite lower real manufacturing (-1.4%) and retail sales

(-0.2%), as well as a drop in existing home sales that should weigh on

construction, which was up 2.0% in June.

     Forecasts ranged from flat to +0.4%.

     Reflecting the 0.1% growth consensus, Action Economics analyst Ryan Brecht

warned against the downside risk to his forecast in light of the contraction in

retail and manufacturing sales.

     Still, he sees third quarter real GDP growth printing at an annualized rate

of 2.5%, which would roughly match the BOC's moderation scenario, he told MNI.

     "Combine that with a firmer level of GDP than they had expected and an

economy that may return to full capacity sooner than expected (end Q3 vs. end of

this year)," a 25 basis point rate hike in October "remains in play," Brecht

said.

     For Desjardins Senior Economist Jimmy Jean, however, the 0.1% consensus

expectation for monthly GDP growth looks like a downside scenario.

     Instead, he expects July GDP growth to pick up to 0.4% from 0.3% in June,

placing him at the high end of the forecasting range, an "aggressive call" with

more of a downside risk than an upside risk.

     Still, "even if GDP came in on consensus in July, Q3 GDP would remain

comfortably above potential in our tracking," Jean told MNI.

     He currently sees third quarter GDP growth at 3.1%, compared to 2.0% to

2.5% expected by most economists. 

     As a result, Jean calls for a rate hike in October. "This is of course

unless (BOC Governor Stephen) Poloz forces to reassess our thinking next

Wednesday," he said.

     Jean referred to the speech to be delivered Wednesday at 11:45 am ET by

Poloz, titled "The Meaning of 'Data Dependence': An Economic Progress Report,"

followed by a press conference at 12:55 pm ET.

     In its latest economic update last Wednesday, the OECD upgraded Canada's

GDP growth forecast by 0.4 percentage points to 3.2% in 2017, compared to 2.8%

for the BOC, which is likely to be upgraded in light of September's policy

statement stressing that "recent economic data have been stronger than

expected."

     At the low end of the forecasting range, Capital Economics analysts

anticipate a flat GDP in July, still translating into a third quarter estimate

of 2.0%, matching the BOC's projection.

     Even so, according to a commentary, Capital Economics analysts expect the

BOC to hike rates a third time this year to 1.25% from 1.0% currently, although

"a worsening housing downturn and the negative knock-on effects from a house

price correction" should lead the BOC to end its tightening cycle next year when

growth slows to 1.5% from 3.0% this year.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

[TOPICS: M$C$$$]