Canada Economic Outlook – 29 March 2019

The Canadian economy hit a speed bump in 4Q18, with growth decelerating to just 0.4% annualized. Growth in earlier quarters of 2018 was revised down. Moreover, on a monthly basis, output actually contracted in December, implying a weak hand-off to 1Q19 and this whole year. Some of the year-end weakness was anticipated due to the sharp 4Q fall in oil prices and is projected to continue in 1Q19 due to the resultant announced mandatory (but temporary) production caps in Alberta. However, the broader impact was larger than anticipated, with consumer spending up just 0.7% in 4Q and business fixed investment contracting for a third consecutive quarter. By contrast, employment growth has remained strong, and in fact re-accelerated on a yoy basis in January and February. That, along with an improving trend in wage growth, should underpin support for the consumer segment in 2Q and beyond, once the oil-price induced macro fluctuations subside. Meanwhile, accelerated depreciation rules for tax purposes and a somewhat more constructive tone in terms of global trade disputes (especially US-China) should buoy business investment. Nevertheless, the uninspiring hand-off from the prior year-end has led us to revise down the forecast for 2019 growth to just 1.4%. Accordingly, we now expect the Bank of Canada to remain on hold until October. We also foresee a lower path for long bond yields over the forecast horizon.


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