MNI BOC State of Play:US GDP Raises Upside Risk,But Not Enough

By Yali N'Diaye

     OTTAWA (MNI) - Of the five risks to the inflation outlook singled out by

the Bank of Canada Wednesday, two were upside risks, including a stronger real

GDP growth in the U.S.

     Friday's U.S. GDP data happened to check one mark on that front, with real

annualized GDP expanding by 3.0%, topping analysts' expectations in a MNI survey

that had centered on a 2.7% gain.

     While analysts had expected uncertainty related to hurricanes to weigh on

the country's economic performance, the end result showed "quite a robust

underlying picture for U.S. growth in the near term," Fitch Chief Economist

Benjamin Rippey said in a commentary.

     Higher business investment was a particularly good sign for Canada, where

the BOC estimated that "stronger U.S. household spending and public and private

investment would have positive spillovers for Canadian business confidence,

investment and exports."

     The BOC expects Canada's real GDP growth to slow to 1.8% in the third

quarter, revised down from 2.0% in July, before picking up to 2.5% in the fourth

quarter. 

     Over the longer term, in 2018 and 2019, the BOC expects the composition of

growth to remain "relatively balanced," with "solid" foreign demand supporting

exports and business investment although the recent Canadian dollar appreciation

is seen as a drag. However, Friday's data provided support for further Fed

tightening, which should help put downward pressure on the Canadian dollar, with

markets already pricing in a high chance of a Fed rate hike in December against

a BOC on hold.

     That being said, there are still three downside risks to the BOC's

inflation outlook versus two upside risks, with the worsening turn of NAFTA

negotiations having just increased global uncertainties, now deemed

"substantial."

     Against this backdrop, the BOC has maintained its "cautious" approach,

signaling it is taking time to assess the sensitivity of the economy to rising

interest rates, economic potential, as well as subdued wage growth and

inflation.

     The BOC also noted that while the economy is operating close to its

potential, "there could be room for more economic growth than the Bank is

projecting without inflation rising materially above target."

     Governor Stephen Poloz reinforced the cautious tone during a press

conference. Despite the clear indication that rates need to be raised again at

some point, Poloz indeed said that "given our recent history with inflation

running below target, we continue to be more preoccupied with the downside risks

to inflation."

     So while Friday's U.S. GDP data created an upside surprise, the bar is high

for risks to tilt enough to the upside to warrant an immediate action.

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

[TOPICS: M$C$$$]