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Are Bank of Canada Predictions for Next Year Too Optimistic?
What is in store for the Canadian economic forecast? There is some disagreement about the matter.
On April 24, 2019, the Bank of Canada (BOC) shared their predictions for what 2020 will bring the Canadian economy. They expect to see 1.2% growth in the remainder of 2019 due to lower oil prices and other factors such as global trade uncertainty, tariffs, “restrained” consumer spending and housing market activity.
However, the BOC said in their Monetary Policy Report that they expect “growth to pick up in the second quarter of this year as these negative effects fade. Growth should increase to 2.1% in 2020.” They also expect consumer price growth to stay close to their 2% target.
Nevertheless, while the BOC is forecasting economic growth in 2020, not everyone agrees. David Doyle, North American economist and Canadian market strategist at Macquarie Group, spoke with BNN Bloomberg after the April BOC announcement, calling the 2020 forecast “too optimistic.”.
“Where I do see downside risks to their forecast is more so in 2020,” Doyle told BNN Bloomberg. “And in 2020, they’re calling for 2.2% growth or so – that to me is much too optimistic. I’m a full percentage point below that in my growth forecast.”
Doyle said there are two main reasons to anticipate slower activity than what the BOC is forecasting for next year.
The first has to do with mortgage renewals.
“In the first quarter of 2020, people that are renewing their five-year fixed-rate mortgages – are the same people that took out those mortgages when the Bank of Canada cut rates in the first quarter of 2015,” Doyle said.
“So, you actually have a very significant rate-reset headwind that comes back in 2020 and persists through 2021. And it’s just a function of the fact that rates were very, very low over the 2015 and 2016 periods.”
The second factor Doyle sees affecting the 2020 forecast is a softening in the U.S. economy.
“Canada’s actually had – despite our low growth for the last few years – we’ve had a very strong tailwind from a very robust U.S. economy,” Doyle said. “In the U.S. economy we still have strong, solid growth ahead, but it is likely to slow from here.”
At the April 24 BOC announcement, the overnight interest rate remained at 1.75%. Many economists are speculating that interest rates will not increase again in 2019.
The next BOC announcement is scheduled for May 29, 2019.
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