Canada Growth Probably Stalled, Allowing Carney to Pause

Canadian growth probably stagnated at the start of the year as consumers restrained their spending, giving Bank of Canada Governor Mark Carney more reason to further delay raising interest rates.

Statistics Canada will report the economy grew at a 1.9 percent annual pace in the January-March period, little changed from 1.8 percent in the prior quarter and less than Carney’s forecast of 2.5 percent growth, according to the median forecast in a Bloomberg News survey of 25 economists. Domestic demand probably increased at a 1.2 percent rate, the slowest since the recession that ended in 2009, according to Bank of Montreal.

“Tentative consumers and cautious businesses are keeping growth restrained,” said Benjamin Reitzes, an economist at the Toronto-based lender. With government spending also expected to be weak, the central bank will probably “take a bit more of a cautious tone” in its June 5 interest-rate announcement.

The Bank of Canada said in April that a rate increase “may become necessary” amid consumer-led domestic growth and improved prospects for Europe. Investors, who initially increased bets for an interest-rate increase by the end of the year, are now predicting a cut as elections in Greece this month raise the prospect the nation might exit the euro.

Today’s report on first-quarter output is the last major indicator before the bank’s interest-rate decision. The key policy rate has been 1 percent since September 2010, the longest unchanged period since the 1950s.

“The Bank of Canada will be limited by weaker domestic demand and financial-market contagion risks stemming from an unresolved European debt crisis,” Bricklin Dwyer, an economist at BNP Paribas in New York, said in an e-mail. “These factors will probably push their June 5 statement in a more dovish direction compared with April.”

Growth Forecast

The central bank forecast in April consumption and housing would account for two-thirds of Canada’s 2.4 percent economic growth this year. Since then, Statistics Canada reported retail sales fell 0.2 percent in February, following a 0.2 percent January gain that trailed forecasts. Chief executives of retailers such as Edmonton, Alberta-based furniture seller The Brick Ltd. and home-improvement chain RONA Inc. say shoppers are cautious.

“It appears that consumer uncertainty will continue in the near term,” Violet Konkle, Chief Executive Officer at The Brick, said on a May 8 earnings call.

Carney and Finance Minister Jim Flaherty have been urging consumers to be careful with debt for over a year. Low interest rates have fed a housing boom, and Carney has said that record consumer debt burdens are the biggest domestic economic risk.

Consumer Confidence

Consumer confidence has also been held back by concerns about job security, with the Conference Board saying May 25 that its question about whether Canadians expect more or fewer jobs in their community has generated a negative balance of opinion for almost a year.

Flaherty’s March 29 budget contained plans to fire 12,000 government workers as the majority Conservative government tries to eliminate a C$23.5 billion ($22.8 billion) budget deficit by the fiscal year beginning April 2015.

While consumer spending has been weaker than forecast, foreign trade has shown surprising strength. Canada reported five straight monthly surpluses in merchandise trade through March, the longest string since the last recession. Statistics Canada reported yesterday a deficit in the country’s first-quarter current account, the broadest measure of trade, that was smaller than economists forecast.

Challenge to Competitiveness

The Canadian dollar traded close to parity with the U.S. dollar throughout the first quarter, and Carney has said its persistent strength is a challenge to business competitiveness. Still, demand from outside the country may mean that trade may add to first-quarter growth, according to Krishen Rangasamy, senior economist at National Bank Financial in Montreal.

“We are expecting a more-than-decent print for first quarter export growth” based on the last monthly trade figures, he said.

Canadian National Railway Co., the country’s biggest rail carrier, boosted its full-year forecast April 23 after posting higher first-quarter profit than analysts projected. The company is benefiting as coal shipments for overseas steelmakers, metals, minerals and consumer goods advance.

Canadian stocks lagged behind their U.S. counterparts during the quarter. The Canadian Standard & Poor’s/TSX Composite Index rose 1.5 percent in the period, behind the 10.3 percent gain in the U.S. Standard & Poor’s 500 Index. Canadian government bonds were better performers, losing 0.75 percent in the quarter, while U.S. Treasuries fell 1.29 percent.

Growth Forecast

Economists forecast Canadian growth won’t accelerate much later this year, predicting a pace of 2.3 percent in the fourth quarter.

While the demand that pushed the country’s April housing starts to the highest since 2007 may be sustained, other parts of Canada’s economy will probably fade.

“Domestic demand is likely to remain soft through much of this year as consumer credit growth softens and investment decisions are put off until Europe-related uncertainties subside,” Rangasamy said.

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