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Surprising growth surge forces forecasters to revisit economic predictions

FILE PHOTO - The Bank of Canada building is pictured in Ottawa on Sept. 6, 2011. The economy's surprisingly powerful second-quarter performance is pushing forecasters to change their outlooks, starting with predictions for Wednesday's central bank rate announcement.
Image Credit: THE CANADIAN PRESS/Sean Kilpatrick
September 05, 2017 - 8:45 PM

OTTAWA - A surprisingly powerful performance from the Canadian economy is pushing some forecasters to change their outlooks — starting with their predictions for Wednesday's central bank rate announcement.

It's also led others to start questioning whether the Trudeau government's multibillion-dollar plan to boost infrastructure spending for the coming years risks overheating the already-sizzling economy.

Last week, the latest growth numbers showed the economy expanded at an annual pace of 4.5 per cent in the second quarter of 2017. The bigger-than-expected surge, driven by consumer spending, followed an impressive jolt of 3.7 per cent growth over the first three months of the year.

The growth, which is measured by real gross domestic product, caught markets by surprise and has many experts revising their expectations on when the Bank of Canada will hike its trend-setting rate.

More of them now expect the next increase to land Wednesday, instead of later this fall as most had anticipated just days ago.

"Everybody was wrong by a wide margin — that really doesn't happen very often," Randall Bartlett, chief economist for a University of Ottawa think tank, said in reference to the second-quarter GDP number beating the consensus call of 3.7 per cent.

"That kind of spooked everybody in the market."

Scotiabank's Derek Holt is among those who moved up their rate call after the GDP release.

While he acknowledges a rate hike Wednesday is no "slam dunk," he expects governor Stephen Poloz to move because growth has far exceeded the Bank of Canada's projections.

Holt said the economy has seen an average annualized growth rate of 3.75 per cent over the last four quarters, which more than doubles the central bank's estimate for that period.

Poloz raised the rate in July to 0.75 per cent from 0.5 per cent to undo one of the two 25-basis-point cuts he introduced in 2015 as insurance following the collapse in oil prices. He's widely expected to increase it by another 25 basis points to essentially reverse the bank's other 2015 reduction.

But despite the big GDP numbers to start 2017, many analysts — including Bartlett — still expect Poloz to wait until October.

Some believe he'll aim for October to give himself time to telegraph the increase to markets. Next month's scheduled announcement will also be accompanied by the bank's quarterly update of its projections, as well as a news conference, which would allow him to thoroughly explain his decision.

The stronger-than-expected economy has also encouraged some experts to call on the federal government to revisit the timing of its massive infrastructure-spending plan.

As the centrepiece of its plan to improve the economy's long-term prospects, Ottawa committed to invest about $186 billion into infrastructure across Canada over the next 11 years.

National Bank senior economist Krishen Rangasamy said Ottawa should consider delaying some nearer-term infrastructure investments as the economy strengthens. Otherwise, the extra stimulus could force the Bank of Canada to raise rates more aggressively, he warned in a research note to clients.

"These days, there are fewer folks arguing for infrastructure stimulus," wrote Rangasamy, who admitted he was among those calling for such a move as recently as last year.

"Not only is the Canadian economy booming ... but more importantly, private business investment is now bouncing back."

Holt said he supports longer-term spending to upgrade the country's aging infrastructure, but in the short term doesn't believe the government should be stimulating the economy while the central bank is trying to cool it down.

The most recent GDP data shows the government infrastructure money has already started to lift growth, Bartlett said. Combined with the stronger economy, he warned, there's a risk the infrastructure injection could eventually boost inflation.

Either way, he said, Ottawa would have a difficult time turning off the tap — particularly on provinces and cities that are counting on the cash.

"A lot of that money's already flowing and a lot of that money's already been approved, so it's pretty tough to scale all of that back now," said Bartlett, who also noted how it was a key pledge for the Liberals.

"It's tough because from a political perspective they've put so much weight on the infrastructure program."

Follow @AndyBlatchford on Twitter

News from © The Canadian Press, 2017
The Canadian Press

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