Canada Economic Outlook – 9 October 2019
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- The Canadian economy has been relatively resilient in the face of global growth and trade war headwinds.
- Following soft readings at the turn of the year and a blistering 2Q19 reading, GDP growth in 2H19 is likely to remain modest, just below potential.
- Labor market indicators are strong, underpinning the consumer segment outlook.
- Housing market indicators are finally rebounding.
- The output gap from earlier in the year has now closed and inflation is right at target.
- The external backdrop is likely to force the Bank of Canada into a rate cut early next year.
- Long bond yields will remain lower for longer.
The Canadian economy has been relatively resilient in the face of global growth and trade war headwinds. The pace of advance in the services sector has accelerated, to 2.5% yoy in July, employment and income growth remain strong, housing markets are rebounding, and inflation is right on target. In Bank of Canada's (BoC) assessment, the modest output gap that opened up around the turn of the year is now closed. At the same time, elevated debt burdens are a headwind for consumer spending, with real retail sales flat yoy in July, following a soft overall household consumption print for 2Q19.
Additionally, the Canadian manufacturing sector output declined yoy in June and July (the latest available data), in line with the sector's struggles elsewhere in the world. Net exports were a significant contributor to robust 2Q19 GDP growth, but are likely be more neutral in 3Q19 according to trade balance data through August, and the trade war-related uncertainty is unlikely to abate significantly in the near term. With the US overnight rates likely to fall below Canadian ones soon, we now see the Bank of Canada also cutting rates early next year. Given a further down leg in global long bond yields this summer, we also project a lower path for the 10-year yield.