REPEAT: MNI PRE-BOC: Canada GDP, Trade Fears Seal Status Quo

Repeats Story Initially Transmitted at 20:50 GMT Mar 2/15:50 EST Mar 2

By Yali N'Diaye

     OTTAWA (MNI) - A weaker-than-expected fourth quarter GDP growth and revived

protectionism fears in the wake of U.S. President Donald Trump's announcement of

new steel tariffs to come could seal the Bank of Canada's status quo next

Wednesday.

     The central bank last raised its overnight rate target to 1.25% in January

2017.

     While Canada's economic growth did accelerate to 1.7% in the fourth

quarter, as reported Friday by Statistics Canada, it was less than the 2.0%

expected by analysts in a MNI survey, and more importantly, less than the BOC's

own 2.5% projection.

     In addition, with the third quarter GDP growth rate revised down to 1.5%

from 1.7%, the slowdown in the second half of the year was more pronounced than

expected. 

     --PROTECTIONIST THREAT

     On the external front, if anything, developments since Thursday are likely

to reinforce the central bank's cautious approach, helping seal a status quo

next Wednesday.

     "The prospect of a notable shift toward protectionist global trade policies

remains the most important risk surrounding the outlook," the BOC repeated in

its January Monetary Policy Report.

     On Thursday, Trump announced his plan to raise tariffs on imported steel

and aluminum, which sent stocks spiraling down and drew strong negative

reactions at home and abroad, including in Canada.

     "As the number one customer of American steel, Canada would view any trade

restrictions on Canadian steel and aluminum as absolutely unacceptable," said

Canada Foreign Affairs Minister Chrystia Freeland.

     On Friday, Trump's comments further exacerbated fears of an international

trade war.

     "When a country (USA) is losing many billions of dollars on trade with

virtually every country it does business with, trade wars are good, and easy to

win," he said in a tweet.

     --DATA JUSTIFY CAUTION

     Yet the BOC has made clear the protectionism threat, including uncertainty

related to the North American Free Trade Agreement renegotiation won't prevent

it from tightening further if data justify it.

     But data since January 17 would make it hard to justify a rate hike at this

stage.

     In addition to Friday's disappointing fourth quarter GDP figures,

Statistics Canada reported Wednesday that businesses capital spending intentions

on non-residential construction and machinery and equipment are up just 0.8% for

this year, and it will be led by the public sector.

     In the private sector, businesses anticipate to reduce spending by 1.1%

from 2017, which would be the fourth consecutive decline.

     Against this backdrop, a cautious approach would equate to further

wait-and-see, giving more time to the BOC to assess its recent rate hikes impact

on the economy, especially the housing market, which is also adapting to tighter

underwriting standards in effect since January 1st.

     --POLICY MIX

     Another input came from the fiscal side this time, as the government

presented the 2018 budget Tuesday.

     But on that front, the overall federal deficit and debt trajectory was not

changed since the Fall 2017 update, meaning the fiscal side of the policy mix

remains the same. 

     The federal budget deficit is expected to be C$19.4 billion for

FY2017-2018, compared to C$19.9 billion last fall. The gap is expected to narrow

to C$18.1 billion in FY2018-2019, compared to C$18.6 billion.

     --TIGHTENING BEYOND MARCH

     Still, wages and underlying inflation have been maintaining an upward

trend, which will keep the central bank on a tightening path.

     While total inflation drifted further away from the 2% target in January,

when it declined to 1.7% from 1.9% the previous month, it had been anticipated

by the BOC.

     In addition, the range of three BOC's preferred measures of underlying

inflation edged up to 1.8%-1.9% from 1.6%-1.9% in December. CPI-common picked up

to 1.8% from 1.6%, the largest gain since April 2012. CPI-trim and CPI-median

were steady at 1.8% and 1.9%, respectively.

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