Trial now

Firming In Early Trade


Better offered in G10s

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.
     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 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:
[TOPICS: M$C$$$]