MNI DATA ANALYSIS: Stronger GDP Shouldn't Accelerate BOC Hikes

By Yali N'Diaye

     OTTAWA (MNI) - The Canadian economy rebounded more strongly than analysts

had expected in February, adding upside risk to the Bank of Canada's first

quarter growth projections, and leaving the BOC on track for tightening.

     February's rebound was nonetheless expected, as was its cause, and the

outperformance was just 0.1 percentage point versus analysts' expectations,

which makes it unlikely to accelerate the BOC tightening pace, especially as

trade-related uncertainties remain despite progress on the NAFTA front.

     The expansion was led by the goods sector, which was up 1.2%, the largest

gain since May 2017, as mining, quarrying, and oil and gas extraction rose 2.4%.

Services edged up 0.1%. In both sectors, the composition of growth brought no

surprise.

     But even without the 1.6% energy gain, GDP advanced 0.3% in February,

following a 0.1% increase in January. Gains were recorded in 15 of 20

industries, illustrating the widespread nature of February's growth.

     --OUTLOOK UNCHANGED

     Should March remain flat, GDP by industry would expand at an annualized

pace of 1.6% in the first quarter after a 2.2% growth pace in the fourth

quarter, fitting into the BOC's scenario of a growth slowdown followed by a

rebound in the second quarter.

     Following the release of Tuesday's GDP data, analysts made minimal changes

to their forecasts of GDP by expenditure.

     However, their growth estimates are above the 1.3% projection by the BOC,

with annualized real GDP growth estimates ranging from 1.5% to 2.0%.

     --NORMALIZATION WON'T ACCELERATE

     The stronger-than-expected GDP comes at a time where higher oil prices and

better NAFTA prospects - along with the extension of the steel and aluminum

tariff exemption for Canada and Mexico - which should reinforce Governor Stephen

Poloz' confidence that policy rates need to rise over time. 

     That being said, trade uncertainties are still here, and the BOC has

signaled it still needs time to assess the impact of tighter macro prudential

rules and higher interest rates on the housing sector and the economy more

broadly, given its heightened sensitivity to rates due to elevated household

debt.

     The combination of such factors suggests the odds of a May rate hike remain

lower than a July hike.

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

[TOPICS: M$C$$$]