Focus Economics has just released its October 2017 Consensus
Forecast for Major Economies and the numbers for Canada bear some consideration
in the wake of our recent surge in real GDP growth. Annualized GDP growth in the second Quarter of 2017 for
Canada according to Focus Economics was 3.7 percent – the highest in all the
G7-which averaged 2.2 percent. The
world economy grew at 3.2 percent; the United States came in at only 2.2
percent while Germany managed only 0.8 percent. So, Canada seems to be on a roll.
However, looking ahead at the 3rd and 4th
quarters and into 2018, the GDP growth rates start to come down. Canada’s 3rd quarter of 2017
is forecast at 2.7 percent while the 4th quarter comes in at
2.5. As for 2018, the 1st
quarter is forecast at 2.5 percent, the 2nd at 2.1 and the remaining
quarters at only 2 percent each.
Canada is still expected to outperform the G-7, which by the 4th
quarter of 2018 is expected to see only 1.8 percent average growth. However, the gap between Canada and the
G-7 narrows considerably.
Part of what is going to cool off the Canadian and G-7
economies is the anticipated rise in interest rates. The rate for three month T-bills in Canada was at 0.54% in 1st
quarter of 2017 but is expected to rise to 1.72 percent by the 4th
quarter of 2018. The average for
the G-7 has it going from 0.54% to 1.14% suggesting that rates in Canada are
currently expected to rise faster than other G-7 countries. Over the same period, 10-year bond
yields are expected to rise from 1.63% to 2.56% in Canada and from an average
of 1.48% to 1.91% in the G-7.
Of course, these interest rates are all still quite low by
historical standards but think of them another way. From the 1st quarter of 2017 to the 4th
quarter of 2018, Canadian T-bill rates are expected to undergo an increase from
0.54% to 1.72% - a percent point increase of 1.18 points but a percentage
increase of over 200 percent. In
other words, there is a doubling of debt service costs. Moreover, this increase is greater than
the average for the G-7.
The coming slowdown in Canadian economic growth is going to
be driven by two interest rate effects.
First, the rise in interest rates will affect borrowing and investment
by Canadian consumers and businesses.
Second, Canadian interest rates rising faster than the United States and
other G-7 countries means that all other things given, the Canadian dollar can also be expected to
appreciate relative to other major currencies also affecting our exports.
In the end, much depends on how quickly Canadian interest
rates continue to rise. Stephen
Poloz, the Governor of the Bank of Canada in last week’s address in St. John’s remarked
that there was “No predetermined path for interest rates from here” suggesting
that future rate increase are by no means preordained.
Of course, this introduces a certain amount of variability
into forecasts as well as some uncertainty into the expectations of consumers
and businesses. In the end, what
this also means is that the amount of cooling off the Canadian economy may face
over the next 18 months is also not predetermined.