MNI PRE-BOC: Growth, Geopolitical Risks Call For More Wait

--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

countries.

     --SLOWER GROWTH

     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.

     --WATCHING HOUSING

     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

elevated.

     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.

     --INFLATION TRENDING UP

     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

materializes.

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

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