MNI POLICY: GDP Weighs As BOC Says "Challenging" Start To 2019

By Yali N'Diaye

     OTTAWA(MNI) - A 0.1% contraction in Canadian GDP in November will add to

downward pressure on the Bank of Canada's growth outlook, as it admitted that

2019 has gotten off to "a challenging start."

     The BOC's fourth quarter forecast of a slowdown in GDP growth to an

annualized 1.3% looks difficult to achieve after Thursday's data from Statistics

Canada. The central bank expects a further deceleration to 0.8% growth in the

first quarter of 2019. Separately, BOC Senior Deputy Governor Carolyn Wilkins

said in a speech Thursday that wage growth was still below where it should be,

adding that "in many ways, 2019 has gotten off to a challenging start."

     She gave no indication the BOC is contemplating dropping its forward

guidance on the need for interest rates to rise to neutral.

     --HOUSING, OIL WEIGH

     For the data-dependent BOC, the latest numbers will counsel further

caution, especially with mandated oil production cuts in Alberta effective from

Jan. 1.

     In November, output in the energy sector contracted by 0.6%. Oil and gas

extraction fell 1.6%.

     Housing also continued to show signs of weakness. Construction activity

contracted by 0.3% in November, the sixth consecutive monthly decrease, to the

lowest level since June 2017. In line with a 2.2% drop in existing home sales,

activity at offices of real estate agents and brokers was down 2.8%, following a

1.7% drop in October. The most recent housing resale data from the Canadian Real

Estate Association, showing a further 2.5% drop in December, do not bode well

for the next monthly GDP reading.

     The services sector brought no relief, failing to expand for the first time

since August 2017. Wholesale trade activity fell 1.1%. Retail trade data also

showed consumers were reluctant to spend, especially on rate-sensitive items

such as cars.

     -EXTERNAL PRESSURE

     External developments will also give further reason for the BOC to pause.

     Housing, lower oil prices, the U.S.-China trade conflict, as well as

Brexit, "are top of mind for all of us," Wilkins said in her speech to the

Toronto Region Board of Trade.

     In its Jan. 9 policy statement, the BOC said its policy rate, currently at

1.75%, will need to rise to neutral, although only "over time."

     The central bank expects non-energy investment and exports to benefit,

among other factors, from the lower Canadian dollar.

     However, with the Federal Reserve seeing a weaker case for raising rates,

and "patiently" waiting for clarification from data, while abandoning its

guidance for "further gradual increases," counting on a lower Canadian dollar

might not be a good bet.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$C$$$]