A Bank of Canada official has already let part of the cat out of the bag, so it won’t be a big surprise when the central bank trims its economic forecast on Wednesday.
Governor Stephen Poloz and his colleagues won’t change their benchmark overnight rate when they meet – it stands at 1 per cent, and there it will stay for some time yet – but they are expected to pull back on what had been a call for a rebound in the second half of this year.
Tiff Macklem, Mr. Poloz’s senior deputy, signalled this in an October speech, saying the central bank now expects economic growth of 2 per cent to 2.5 per cent over the last six months of 2013. That’s down from an earlier average of 3.2 per cent. The central bank’s monetary policy report and rate announcement will go into more detail.
“The global economy has disappointed the bank’s expectation and is due for a downwards forecast revision (U.S. growth in 2014 is particularly vulnerable),” said economists at Toronto-Dominion Bank. “Paired with weaker commodity prices and a smaller-than-expected rebound over the second half of the year, the outlook for the Canadian economy will also be pared back,” they wrote in a report.
“The risk of a slower return to full capacity and an even more subdued outlook for inflation will cement the bank’s position on the sidelines.”
In its summer report, the central bank forecast economic growth of 1.8 per cent for 2013 as a whole, and 2.7 per cent for next year.
Based on various indicators and the weaker-than-expected call for the second half of the year, Nomura Securities expects Mr. Poloz and his colleagues to trim their projections for economic expansion to 1.6 per cent this year, and 2.3 per cent in 2014.
“These revisions would bring the BoC’s expectations closer to ours (1.5 per cent and 2.2 per cent) and the IMF’s (1.6 per cent and 2.2 per cent),” said Nomura’s Charles St-Arnaud.
“On the flip side, we believe that growth in 2015 should remain strong or even slightly strengthen to around 2.8 per cent from 2.7 per cent.”
Senior economist Benjamin Reitzes of BMO Nesbitt Burns added that the first quarter of next year could be “hit by the knock-on effect of U.S. fiscal uncertainty,” though he believes there may be “modest upward revisions” to late-2014 and early 2015.
He also expects the central bank’s policy statement to take “a slightly more cautious tone, with concerns about the fallout from U.S. fiscal follies looming large.”
Indeed, added Mr. St-Arnaud, the Bank of Canada’s look at the U.S. government’s partial shutdown may well draw attention “as it will be among the first takes on the actual damage done to the U.S. economy.” They were referring to the impasse that shut down many government services until a deal was reached last week.