Dawn Desjardins, chief economist for RBC Economics talks with Larysa Harapyn about Canada’s economic outlook, with a regional breakdown.

In terms of overall forecast what can we expect from the Bank of Canada?

I think they may, on an annual basis, up their forecast. In the second quarter the economy expanded much more rapidly than most expected. I think they will generally remain somewhat cautious because we have to think about the world we are living and operating in. And levels of policy uncertainty remain high, and that does have an impact on global growth and the US, our largest trading partner. I think for the Bank they will say, yes things are evolving as we expected, perhaps a touch firmer, our economy continues to grow in line with it’s potential, inflation is basically on target, the labour market is very firm. But being aware that conditions outside our country, are a little more fragile, and that they are going to be indicating, I think, that they are going to be monitoring that. I don’t think it requires any action by the Bank of Canada. Arguably, the overnight policy rate right now is a bit accommodative compared to their neutral rate. So I think that they are comfortable with that. 

What are some of these trigger points that help the Bank of Canada craft this policy?

  • Business sentiment and investment – how that is looking for the future?
  • Exports – are we seeing significant impact? Reduction in demand for goods and services from the US or globally? How does that factor into economic growth?
  • Consumers – yes they are highly indebted households, but interest rates are very low, so that is manageable. 
  • Jobs – continuing to produce a large number of jobs each month and wage growth is accelerating.
  • Housing Market – it has recovered a little more quickly than the Bank was anticipating, but that is positive for our economy.

If we are going to see growth in the 1.5% – 1.75% range, that’s basically in line with the economy’s potential. I think they are going to conclude at the end of all this that the economy is still ok. Navigating through this weak patch in the global economy,I think the Bank will be content to say that policy is appropriate. 

Business sentiment, up until this point it hasn’t been looking very rosy, what is that outlook?

I think business sentiment in manufacturing, has weakened a bit, not nearly as much as we have seen south of the border or in the EU. It has weakened somewhat, but when we look at other surveys business sentiment, it’s holding up reasonably well. We are not looking for a huge inflow of investment activity but we do think that it is not going to be a sharp decline either. 

As per that recent survey, the Bank of Canada suggested that investments in Tech, Automation, Software these were some of the sectors that saw some of the biggest gains.

Which is good from a productivity and efficiency point of view. If we are working in an economy where jobs are being created but there are still a lot of vacancies, this is how you get around that. You become more productive, more efficient, by going into the technology side of the equation. I think that is also encouraging.

South of the border, I believe that the markets have priced in a cut by the Federal Reserve. What happens then, what are the consequences for our Loonie?

I think because it is priced in, and because the market isn’t really looking for the Bank of Canada to do anything, I think at the current rate we are already seeing those factors already priced into the currency. I don’t think that will cause a sharp sell-off or a sharp rally because that is already what the market assumes is going to happen.We also see the currency appreciating recently because oil prices have stabilized and are a little bit higher. From that perspective I don’t think that even if the Federal Reserve does cut interest rates that we will see any significant move on our currency.

A regional snapshot

BC – BC seems to be doing reasonably well. They have the L&G facility that is going to be built. Still seeing good activity in the BC economy. Their housing market is slower but get its feet under it. I would say they are still top of the leaderboard type of economy. 

Central Canada – When you look at Alberta and Saskatchewan, they have been suffering quite a bit. Conversely Ontario and Quebec have been growing quite solidly, Quebec in particular has been the star performer for the economy for the past 18 months.

Eastern Canada – Eastern Canada continues to grow, more slowly than the other economies. Demographics that are quite a bit at work there, so you aren’t seeing significant pick up in terms of economic growth but we are seeing modest gains. 

Source: Financial Post