OTTAWA — The Bank of Canada says the federal government's multibillion-dollar spending boost has uplifted what would have been a modest downgrade to its economic growth forecast this year.
The central bank also kept its trend-setting interest rate locked at 0.5 per cent Wednesday, but it would have considered lowering the benchmark if not for the federal stimulus in areas such as infrastructure.
The bank expects the federal investments of about $25 billion over the next two years to more than offset the negative consequences of a slightly stronger dollar, weaker-than-expected global growth and shrinking investment in the oil sector.
It is now predicting the country's real gross domestic product to expand by 1.7 per cent in 2016, up from its January expectation of 1.4 per cent.
The central bank is keeping its interest rate locked at 0.5 per cent. (Photo: Flickr)
The bank said unexpectedly strong growth in the first three months of 2016 was partly due to temporary factors and that is expected to fade with the loonie's recent rise and slower international demand.
"The combined effect of all these global and domestic developments would have been a modest downgrade of the bank's outlook,'' the bank said in a statement that accompanied the latest release of its quarterly monetary policy report.
"However, the fiscal measures announced in the March federal budget will have a notable impact on GDP.''
It is now predicting first quarter GDP to register 2.8 per cent, up from one per cent. It's also anticipating one per cent growth in the second quarter of 2016, down from the January forecast of 2.2 per cent.
"This was about as small a forecast upgrade as they could have chosen." —CIBC chief economist Avery Shenfeld
Using the same baseline numbers in Ottawa's recent budget, it projected federal and provincial government spending to combine to contribute 0.5 percentage points to growth this year and 0.6 percentage points in 2017. The impacts of provincial measures are expected to be minimal.
But even with the government lift, the bank lowered its 2017 growth projection to 2.3 per cent from 2.4 per cent. That's because non-resource exports, while strengthening, aren't expected to be as robust as previously thought due to the recent increase in the dollar.
Following the announcement, CIBC chief economist Avery Shenfeld wrote in a note that governor Stephen Poloz had no choice but to raise the 2016 forecast since his boss, Finance Minister Bill Morneau, has been ``touting the benefits of fiscal stimulus'' and because the economy saw surprisingly sturdy GDP growth in December and January.
"With that in mind, this was about as small a forecast upgrade as they could have chosen,'' Shenfeld wrote.
The Liberal government's budget contains billions of dollars in spending and tax relief. (Photo: Getty Images)
For 2018, the bank is expecting growth of two per cent, a projection that doesn't account for the potential impact of federal spending measures.
This was the Bank of Canada's first monetary policy report since the Liberal government tabled its March 22 budget, which contained billions of dollars worth of spending measures and tax relief.
To help fund the plan, the budget projected five straight annual deficits totalling more than $110 billion, starting with shortfalls of $29.4 billion in 2016-17 and $29 billion in 2017-18.
The Finance Department estimated the Liberal budget, which includes measures to enhance infrastructure investments and tax relief for middle- and low-income households, will generate economic growth of 0.5 per cent this year and one per cent in 2017-18.
Resource sector's negative factors to gradually fade
The Bank of Canada based its assessment on Finance's growth assumptions, which it considered reasonable.
The differences between how the impacts of the fiscal measures between the Bank of Canada and Finance were mostly due to how they were presented. For example, the bank's numbers were based on calendar years, while the Finance projections were presented in fiscal years.
The bank's report Wednesday listed several federal measures it called ``notable'' for their likely impact on GDP growth. Without going into details, it highlighted the enhanced child benefit plan, environmental projects, programs to improve the socio-economic conditions for indigenous peoples and investments in affordable housing.
The report was released after several recent indicators have suggested the economy is gaining momentum.
The bank, however, remained cautious about the developments, though it does expect the negative factors hurting the resource sector to gradually fade, with their impact on overall economic growth to diminish through 2016.
It also said non-commodity exports in sectors that are sensitive to exchange-rate movements have gained momentum.
Follow @AndyBlatchford on Twitter.
Also On HuffPost:
The carbon bubble is the idea that if the world’s governments meet targets to limit climate change to 2 degrees Celsius by cutting carbon emissions, there will be a glut of fossil fuels on the market that cannot be burned. The concern is that when investors realize oil companies will have to leave much of the product they own in the ground, oil company stocks will collapse, leading to a crisis in the industry that could affect Canada. Among the people concerned about a carbon bubble is former Bank of Canada governor and current Bank of England governor Mark Carney.
Many in Canada’s oil sector have been holding their breath to see whether the U.S. approves the Keystone pipeline,which would see tarry bitumen from Alberta’s oilsands pumped south for export from the U.S. President Barack Obama did not have very nice things to say about Keystone in his year-end press conference, leading some to believe he’s bent on rejecting it. The lack of a functional pipeline capable of getting the oilsands crude to international markets has held back the price of crude produced there. There’s also massive domestic opposition to homegrown alternatives such as the Energy East Pipeline or Northern Gateway.
This promises to be a big year for elections around the world, with votes at home and abroad. The Conservatives presided over a Canadian recession that was relatively mild compared to much of the world, but after nearly a decade of Conservative rule, voters could be ready for a change. The U.K. is looking ahead to an election in May. If the U.K.'s Conservative Party wins and follows through with its promise to hold a referendum on EU membership, it would be a further blow to the Eurozone. The U.S. is looking ahead to an election in 2016, and the year before an election in that country has proven to be an often interesting, volatile ride.
Weak demand and a glut of supply are keeping prices of commodities low, and it doesn’t just affect Canada’s oil patch. The mining sector, one of the heaviest hitters on the Toronto Stock Exchange, could see a resulting slowdown in investment in projects and hiring.
Canada, along with the U.S., is on track for an interest rate hike in 2015. It would be the first since 2010 and consumers — particularly on this side of the border — have continued to pile on debt loads and take out large mortgages in the years of low interest rates. While any hike is expected to be gradual, it could be a shock to some households who are struggling to pay back debt. A higher interest rate could sink more Canadians into bankruptcy and could cause a slowdown in the housing sector, which has propped up Canada’s economy in the years since the recession.
Economists have been warning consumers for years that debt loads are growing to astronomical levels, and that could be a huge risk if interest rates rise. In Canada, the household debt-to-income ratio rose to a new record high of 162.6 per cent in the most recent quarter. And things are not much better south of the border, where consumer debt is worth a total of $3.2 trillion and where there has been a resurgence in subprime lending, the risky banking practice that helped spark the global economic crisis in 2008.
An increase in terrorism and geopolitical instability doesn’t inspire confidence in investors. Threats from ISIS and other terrorist organizations have dominated headlines in the past year and such political uncertainty could spill over into broader conflicts or destabilize markets.
Russia’s ruble has sunk by about 40 per cent in the past few weeks, and the country could soon find itself in recession, partly due to Western sanctions over its aggressive behaviour in Ukraine. As a G8 country, it is a large source of demand for Canadian exports. The country already slapped retaliatory sanctions on Canada in 2014 and the lack of trade could hit Canada’s overall trade figures.
Chinese growth has been a massive driver of the global economy but is losing momentum, affecting the entire global supply chain. Investors are hoping that China’s GDP growth does not come in worse than the 7-per-cent rate it has predicted. A chain reaction caused by the slowdown in China could be particularly concerning for Canada, which had been protected from the worst of the Great Recession, benefitting from Chinese manufacturing’s demand for commodities. In addition, the unrest in Hong Kong, one of the world’s financial hubs, is not over, posing a risk of more uncertainty in the region.
That’s right, Greece is still causing Europe, and global markets, some serious headaches five years after its sovereign debt crisis was first brought to light. It is again making headlines as the new year approaches, with legislators rejecting Prime Minister Antonis Samaras’s nomination for president, Stavros Dimas, triggering a snap election. Polls favour anti-austerity candidates, which could see the country pull away from its debt obligations under its bailout plan with the Eurozone, stoking concerns for the rest of the continent, which is already struggling with sky high unemployment and a shaky financial system. A slowdown in Europe would have knock-on consequences for Canada.
After five years of relatively stable crude prices, oil prices have dropped nearly 50 per cent since June to their lowest level in five years. The drop is a double-edged sword for the Canadian economy. The IMF says it could boost global economic growth by as much as 0.8 percentage points above the expected 3.8 per cent. It’s also good news for consumers, whose savings at the gas pump could translate into more spending elsewhere. However, if oil continues to hover between $60 to $70 a barrel, it could expose weaknesses in oil-dependent countries and companies and even push some to default on debt obligations. The tanking price is bad for Canada’s oilsands, a major source of domestic economic growth and could push the loonie lower.