MNI BOC ANALYSIS:GDP,Biz Survey Leave Window Open For Jul Hike

By Yali N'Diaye

     OTTAWA (MNI) - Canada's GDP held up better than what analysts had expected

in April and the Bank of Canada's own business survey pointed to increasing

pressures on capacity and prices, leaving the window open for a July interest

rate hike.

     The BOC, while not acting on rhetoric, is nevertheless closely watching

businesses' response to uncertainty related to U.S. trade policy, especially

through their investment behavior.

     It is also particularly watching how economic capacity is evolving.

     On both fronts, the central bank's survey Friday offered no reason to back

track from a July rate hike the BOC had started preparing markets for last May.

     --BUOYANT INVESTMENT INTENTIONS

     Investment intentions, "while slightly weaker, are still buoyant," the

survey said, citing "sustained demand and intensifying capacity pressures." 

     The central bank's overall take is that the survey points to "continued

business optimism". This is also reflected in the fact that Canadian businesses

expect a "strong" U.S. economic growth.

     That being said, most interviews were conducted before the U.S. announced

tariffs on its imports of steel and aluminum, to which the Canadian government

retaliated with a final list of products Friday. The BOC said it will

incorporate such tariffs and retaliatory measures in Canada and elsewhere into

its July forecasts, which could lead to a less upbeat outcome that the survey

suggests.

     However, the Canadian government announced C$2 billion in aid for Canadian

companies and workers that could be hit by the U.S. tariffs, which the BOC could

incorporate as a mitigating effect.

     --CAPACITY PRESSURES

     On the capacity front, pressures are mounting, and are mostly labor

related, with labor shortage indicators pointing to tighter labor markets.

     In fact, firms hiring intentions point to "widespread plans" to increase

staffing over the next 12 months, albeit "modestly."

     Hiring plans are broad based across sectors and regions, but are especially

common in the services sector and in British Columbia and Quebec. Some firms

facing labor shortages are planning to respond with higher wages.

     Data next Friday will provide evidence of whether wage growth continues to

pick up, bringing the last major piece of data along with the trade balance

before July 11.

     --INFLATION EXPECTATIONS UP

     With higher capacity pressures, inflation expectations continued to move

up, with 58% of firms expecting inflation to range between 2% to 3% over the

next two years, the highest percentage since the first quarter 2012.

     The bank's control range is between 1% and 3%.

     Firms expect faster input price inflation, with more of them in a position

to pass the increase on to output prices. In turn, stronger demand could allow

to pass on the cost to consumers, some businesses reported.

     --GDP HOLDS

     Separately, Statistics Canada published data for April GDP Friday, which

proved more resilient than analysts had expected in the face of inclement

weather.

     GDP edged up 0.1% after gains of 0.3% in March and 0.4% in February, while

analysts had expected a flat performance.

     In particular, manufacturing rose 0.8%, with GDP excluding manufacturing

remaining flat.

     --NAFTA TALK TO CONTINUE

     Friday's combination of soft and hard data leave an opportunity for the BOC

to hike rates in July and give itself some ammunition should a failure of NAFTA

talks or an intensification of protectionist policies stall growth.

     On Friday, Canada Minister of Foreign Affairs Chrystia Freeland said during

a press conference she expects NAFTA talks to intensify after the Mexican

elections.

     She had previously announced the final list of U.S. products that will be

submitted to 10% and 25% tariffs in response to the U.S. steel and aluminum

tariffs.

     More importantly, Freeland said the issue of U.S. tariffs is separate from

NAFTA negotiations.

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

[TOPICS: M$C$$$]