MNI BOC STATE OF PLAY:Disappointing Trade Adds 4Q Dwnside Risk

By Yali N'Diaye

     OTTAWA (MNI) - Canada's goods trade balance unexpectedly deteriorated in

December and showed Canadian exports failed to significantly benefit from a 2.6%

U.S. GDP growth in the fourth quarter, adding downside risk to the Bank of

Canada's growth outlook.

     In its January 17 Monetary Policy Report, the BOC pointed out the rebound

in exports in the fourth quarter, with non-commodities turning "positive", owing

to consumer goods and machinery and equipment.

     In December, Canada's goods trade deficit with the world widened again to

C$3.2 billion from C$2.7 billion in November, as import growth outpaced export

growth, Statistics Canada reported Tuesday.

     Exports were up 0.6%, but down 0.6% excluding energy. In real terms,

exports were flat in December. 

     For the fourth quarter, export volumes edged up 0.3%, while imports rose

1.2%, leading to a goods trade deficit of C$4.7 billion, widening from a C$3.5

billion gap in the third quarter.

     And while November GDP posted a robust 0.4% gain, it followed a flat

performance in October. Another flat performance in December would mean

annualized GDP growth would slow to 1.7% in the fourth quarter from 2.3% in the

third quarter (based on GDP by industry measures), suggesting December needs a

good showing for the fourth quarter to prove as strong as the third quarter.

     Such readings also imply some downside risk to the Bank of Canada's growth

estimates (GDP by expenditure).   

     The BOC expects real GDP to grow at an above-potential annualized pace of

2.5% in the fourth quarter of 2017 and the first quarter of 2018 before

returning close to potential.    

     The disappointing export readings Tuesday will feed into the cautious BOC's

approach, especially with NAFTA talks still clouding prospects.

     Despite "progress" noted by Canada Foreign Affairs Minister Chrystia

Freeland, positions between the U.S. and its Canadian and Mexican counterparts

remain far apart.

     Also likely to feed the cautious BOC's stance is the stock market

correction, with the central bank likely assessing whether it is the beginning

of a longer-term stock-market downturn that could spread concerns over consumer

and business confidence.

     And if markets are overestimating growth and inflation prospects in the

U.S., feeding expectations of a more aggressive Federal Reserve, the BOC will

likely want to reassure and show it is in no rush to normalize.

     Senior Deputy Governor Carolyn Wilkins said on January 17 that there were

cons to rising rates too quickly or too slowly.

     "Raising the policy rate too quickly would risk stalling the expansion, and

cause inflation to fall back below target," she said. "At the same time, raising

the policy rate too slowly would risk a buildup of inflation pressures."

     So far, indicators continue to show the Canadian economy, while losing some

steam, is still robust despite the three interest rate hikes since July 2017.

     The next big indicator the central bank will focus on will be the Labor

Force Survey on Friday, following housing indicators Thursday.

     On Thursday, Wilkins will speak G7 Symposium on Innovation and Inclusive

Growth, with remarks dedicated to that topic. There will be an audience Q&A but

no press conference.

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

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