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Canada: Output Gap May Persist Past 2014!

ByThe National Bank of Canada
Published 12/04/2012, 07:02 AM
Updated 05/14/2017, 06:45 AM

With Q3 GDP growth ending up four ticks below the Bank of Canada’s 1% estimate for the quarter, coupled with downward revisions to the prior quarters, the central bank now needs Q4 growth of 4.5% annualized to achieve its growth target of 2.2% for 2012, a highly unlikely outcome in our view. What does all of that mean for the output gap?

As today’s Hot Chart shows, given the now lower starting point, even assuming the economy grows exactly as the BoC estimated in its October Monetary Policy Report over the period 2012Q4 through 2014, the output gap won't close until end-2014 (compared to end-2013 as expected in the October MPR). But even that projection is looking optimistic given that the BoC’s estimate for Q4 growth (+2.5%) already looks like a stretch.

Given the weak handoff from September, and assuming unannualized gains of 0.2% in each month of Q4 (Oct-Dec), GDP growth in the last quarter should be around 1.2%. If that’s the case, excess slack will widen to around 1% by year end (point 3 on the chart), the worst in 18 months, and under current BoC projections the output gap would persist past 2014. We would expect Governor Carney, at next week’s interest rate setting meeting, to acknowledge that the Canadian economy is operating with a deeper degree of slack than assumed in the October MPR.
Output Gap May Persist Past 2014

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