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Scotiabank See Above Consensus CPI Inflation

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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$$$]

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