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--In Canada, NAFTA Progress Overshadowed By Fears of US-China Trade War
By Yali N'Diaye
     OTTAWA (MNI) - Since March 7, when the Bank of Canada left its policy rate
unchanged at 1.25%, data that have come in support more wait-and-see a
Wednesday's meeting, especially in a context where better prospects for a NAFTA
deal are overshadowed by fears of an escalation of the US-China trade war.
     The central bank still estimated in March that "some continued
accommodation" was needed while the normalization process ought to continue in
light of the economic outlook. In that regard, upward trending inflation and
wage growth will provide the necessary arguments down the road.
     Meanwhile, "trade policy developments are an important and growing source
of uncertainty for the global and Canadian outlooks," the BOC said in its last
statement. Since then, hopes for a NAFTA deal have increased with reports the
U.S. is softening its stance on some demands in the auto industry that were
deemed unreasonable by its partners. However, progress on that front has been
overshadowed by fears of an escalation of trade tensions between the U.S. and
China, that could potentially lead to a more global trade war involving other
     Certainly the 0.1% real GDP growth contraction in January will keep the
need for some accommodation intact in the short term.
     Most private sector economists now expect the BOC's 2.5% annualized GDP
growth projection in the first quarter to be missed.
     In fact, earlier Tuesday, in its World Economic Outlook, the International
Monetary Fund revised down its growth outlook for Canada this year to 2.1% from
2.3%, bringing it slightly below the BOC's 2.2%.
     While it is almost assured that the BOC's first quarter GDP growth estimate
will be revised down, how much of a rebound is expected beyond that will be key,
since the central bank's actions are forward looking.
     As the BOC continues to watch the economy's response to higher interest
rates, housing is particularly sensitive. The sector's activity slowed more than
expected in January and February in response to tighter regulatory policies
while monetary policy continues to normalize and household debt remains
     Housing weakness explained part of the GDP's underperformance in January.
     Whether the BOC expresses concerns that the weaker home sales could lead to
a change in sentiment that in turn could accelerate the sector's correction -
both activity and prices - will be of interest.
     For now, it can still argue that the timing of sales in response to new
macro prudential rules explains the housing slowdown.
     While slower growth and geopolitical uncertainties will likely remain key
arguments to justify a status quo on Wednesday, the recent upward trend in
inflation will complicate the case going forward.
     Analysts expect inflation to stand well above the 2% mid-range target in
March, when Statistics Canada releases the report on Friday, in a context where
wage growth has also been trending up.
     In its own Business Outlook Survey, the BOC found that inflation
expectations increased, with 53% of firms expecting inflation to be in the upper
half of the BOC's 1%-3% range over the next two years, the highest percentage
since the second quarter 2012.
     In addition, the survey indicated that uncertainty related to U.S. trade
policies has not had any dramatic impact on firms' investment plans, and most
"anticipate no clear impact over the coming 12 months," including exporters.
     Meanwhile, although the indicator of production capacity pressures
moderated, it remained close to recent high levels.
     Against this backdrop, the BOC's assessment of the evolution of capacity
will be particularly important, and should activity rebound after a
disappointing start to 2018 - as February manufacturing sales suggested Tuesday
- a hike could be warranted sooner rather than later, especially if a NAFTA deal
--MNI Ottawa Bureau; +1 613 869-0916; email:
[TOPICS: M$C$$$,MX$$$$]

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