BUSINESS
01/17/2020 10:51 EST

Canadian Economy Already Recovering From Slump, Poll Of Economists Finds

Borrowers shouldn't count on lower interest rates this year if the economy heats up.

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Pedestrians on the Ste-Catherine shopping strip in Montreal, Que., Nov. 25, 2017. Canada's rebound from an economic slump at the end of last year likely means no interest rate cuts this year for borrowers.

A revival in the Canadian economy may already be underway, according to a Reuters poll of economists, who were mostly confident a rate cut was not needed and so predicted monetary policy would remain unchanged this year.

Nearly 70 per cent ― or 27 of 39 ― economists who provided a year-end outlook expected the central bank to keep its key interest rate on hold at 1.75 per cent this year, compared with just over half, or 16 of 31, in a poll taken before the previous meeting in early December.

All but one respondent in the latest poll expected rates to remain unchanged when the BoC meets on Jan. 22, in line with the futures market’s view.

Watch: Will Canadians see a recession or a pay hike in 2020? Story continues below.

 

Optimism among economists was partly driven by a trade agreement signed by China and the United States this week after an 18-month trade war and by the latest labour market data, which showed more jobs than expected were added in December.

“The BoC should be encouraged by the rebound in employment, remaining in a data-dependent mode and unlikely to cut rates in 2020,” noted Veronica Clark, an economist at Citi in a research report.

“The December rebound in jobs is an encouraging sign that early-Q4 weakness apparent in recent data releases is temporary.”

The Jan. 13-16 poll of over 40 economists predicted the economy would grow at an annual rate of 1.6 per cent this quarter after expanding 0.8 per cent last quarter.

It was expected to grow 1.7 per cent every quarter after that until the second quarter of next year. More than 85 per cent ― 18 of 21 ― respondents said the recent economic slowdown in Canada was temporary. A majority said the economy’s revival was already underway.

“We are still subject to the winds of what’s going on globally. If the global economy is able to hold up in the course of this year, we would likely to do the same,” said Benjamin Reitzes, senior economist at BMO Capital Markets.

“I wouldn’t expect particularly strong growth in Canada, but we should hang in there if the global economy does as well.”

The jobless rate was predicted to average 5.8 per cent from next quarter through to mid-2021 ― the forecast horizon ― a touch below the 5.9 per cent forecast in an October poll. It averaged 5.7 per cent last quarter.

Inflation was expected to remain below the central bank’s target of around 2 per cent, averaging 1.9 per cent this year and next year.

Don’t count on a rate cut

That inflation outlook should keep the Bank of Canada on the sidelines this year, where it’s been since October 2018, even when the U.S. Federal Reserve and European Central Bank eased policy.

Nearly three-quarters of respondents, or 17 of 23, said the Canadian economy does not need an interest rate cut before the end of 2020. That is a shift from a survey last month where economists split almost evenly on whether a rate cut was needed.

“The economy would need to go through a severe unexpected negative shock to seriously consider policy rate cuts,” said Sebastien Lavoie, chief economist at Laurentian Bank.

“In the context of a muddling through economy, the bar remains high for the BoC to embark on a new round of easing or tightening.”

(Reporting and polling by Mumal Rathore; editing by Larry King)