Canada continues to be affected by a dampened outlook on the global economy as the Bank of Canada announced today that it would hold its overnight lending rate due to lower-than expected economic growth.
The historically low rate of 1 per cent, which has been in place since September 2010, will remain as such due to several factors, namely the European debt crisis, high Canadian household debt, and high commodity prices. As a result, the BoC is less optimistic over our nation’s future growth than it was in April, predicting the economy will only increase 2.1 per cent in 2012, and 2.3 per cent in 2013 – a decrease from previous forecasts of 2.4 per cent for both years.
However, it’s not all doom and gloom – the bank predicts that some moderate growth will be seen, stimulated by factors such as consumption and business investment.
“While global headwinds are restraining Canadian economic activity, domestic factors are expected to support moderate growth in Canada,” the bank said.
Due to this support, it’s forecasted that our economy will strengthen by 2.5 per cent in 2014, and that production potential will step up, closing the output gap (the difference between a nation’s current production capacity and its potential for productivity) by 2013.
The Global Impact
It comes as no surprise that Europe’s debt troubles and renewed contraction continue to make waves world wide with a predicted decline in the 17 EU countries of 0.3 per cent – and that this uncertainty would be reflected in the Bank of Canada’s outlook. What’s further compounding this, though, is slower-than-hoped growth in the emerging market economies, namely China. “In China and other emerging economies, the deceleration in growth has been greater than anticipated, reflecting past policy tightening and weaker external demand,” the bank said in a statement. Fears of a U.S. budget crisis next year further add to the uncertainty.
On The Home Front
This is the first rate announcement since June’s sweeping mortgage rule changes, and it’s apparent they’re making their mark, with the Bank anticipating a record housing market slowdown. Markets had already started to cool in several of Canada’s urban centres – notably Vancouver and Toronto – before the rules even took place. In the month since the announcement, existing housing sales dropped 1.3 per cent – and are down a full 4.4 per cent from June 2011.
The changes, which were put in place to chill Canadian household debt levels and re-balance the overheated market, included a new 25-year amortization limit on home purchases requiring CMHC insurance, and a decrease to 80 per cent from 85 per cent for HELOCs.
According to Diana Petramala, an economist with TD economics, “The Bank of Canada will likely want to see the impact these new rules have on domestic spending before lifting rates.”
The Commodity Squeeze
The Bank of Canada had long expressed concern over consistently high commodity prices, namely gasoline, and the effects they would have on the economy. BoC said in their statement, “Given the recent drop in gasoline prices and with futures prices suggesting persistently lower oil prices, the Bank expects total CPI inflation to remain noticeably below the 2 per cent target over the coming year.”
Other Economic Indicators
In addition to high consumer debt and a trepidatious time for the housing market, Canadian exports are expected to remain below their pre-recession peak until 2014, reflecting weaker foreign demand and a strong Canadian dollar.
The government isn’t anticipated to contribute to growth either this year, as there are plans to consolidate provincial and federal funding.
A full update of this outlook on economy and inflation will be released tomorrow. The next scheduled rate announcement date is September 5.