Week in review
Canada – As widely anticipated, the Bank of Canada left its overnight rate unchanged at 0.50% in April. However, the central bank revised its GDP projections and presented a first forecast for 2018, pegging growth at 2% that year. Though the BoC raised its 2016 growth forecast for Canada from 1.4% to 1.7%, it was careful not to sound too positive. The bank did not wish to stoke the Canadian dollar, which was already at a multimonth high versus the USD. It expected measures introduced at the provincial level to offset some of the federal stimulus.
Moreover, the central bank highlighted risks to the global economy but, more importantly, expected a lower growth profile in the United States with “a composition that is less favourable for Canadian exports”, a factor likely to cause trade to be a net drag on the Canadian economy next year. The bank was now forecasting that economic growth in the United States would attain 2.0% in 2016 and 2.1% in 2017, down from 2.4% for both years previously. Consequently, despite the federal government’s fiscal stimulus, the BoC lowered its 2017 projection for domestic growth in Canada from 2.4% to 2.3%.
This notwithstanding, the output gap was now slated to close by mid-2017, ahead of the target date set back in January. Slack would be eliminated sooner than previously expected partly because of a lower potential growth rate due largely to the collapse in investment. The BoC raised its inflation forecasts slightly, though headline inflation was still not expected to return to 2% before 2017. The central bank indicated that the risks to inflation were roughly balanced.
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