July 20 (Bloomberg) -- Canada’s economic growth is at risk of falling behind the U.S. next year for the first time since 2006 as exports slow and spending by companies and consumers cools.
A lower-than-forecast increase in consumer prices reported today by Statistics Canada adds to evidence of a slowdown. Data this month showed the trade deficit widened in May and factory sales fell. Bank of Canada Governor Mark Carney this week lowered his growth projection for the world’s 10th largest economy this year to 2.1 percent from 2.4 percent.
Carney reiterated that it “may become appropriate” to raise the benchmark lending rate for the first time since September 2010, even as a slowing global economy prompts central banks from China to the U.S. to ease policy. Investors are skeptical of Carney’s outlook: trading based on overnight index swaps shows no chance of an increase through the end of the year. The median estimate of economists surveyed by Bloomberg is for the first increase to come in the second quarter of 2013.
While today’s report probably doesn’t fundamentally change the central bank’s outlook, it “does allow them to stay on hold for longer given that inflation has been surprising on the low side,” said Doug Porter, deputy chief economist at Bank of Montreal, by telephone.
The consumer price index climbed 1.5 percent in June from a year earlier, compared with a 1.2 percent gain the prior month, Statistics Canada said today. The core rate, which excludes eight volatile products, increased 2.0 percent after a gain of 1.8 percent in May. Economists surveyed by Bloomberg projected a 1.7 percent gain for CPI and 2.3 percent increase for the core figure.
Bonds rose, with the yield on the benchmark 2-year falling 2 basis points to 0.95 percent at 4:27 p.m. in Toronto.
The International Monetary Fund this month projected that Canada’s economy will expand 2.2 percent in 2013, less than growth of 2.3 percent in the U.S. Canada is forecast to grow 2.1 percent this year, compared with 2 percent in the U.S., which buys more than 70 percent of its exports.
“The very material risk is that Canada faces a prolonged period of softer growth than the Bank of Canada is anticipating,” Derek Holt and Dov Zigler, economists with the capital-markets unit of Bank of Nova Scotia, said in a research note this week. Holt and Ziegler say Carney may not move until the second half of next year “at the earliest” and possibly not even until 2015.
Elsewhere today, data showed Britain had a bigger budget deficit than economists forecast in June, casting fresh doubt on whether Chancellor of the Exchequer George Osborne can meet his full-year fiscal goals.
The shortfall, which excludes government support for banks, was 14.4 billion pounds ($23 billion) compared with 13.9 billion pounds a year earlier, the Office for National Statistics said in London today. The median forecast of 20 forecasts in a Bloomberg News survey was for a deficit of 13.4 billion pounds.
Canada’s slowdown may dim the nation’s allure for investors seeking havens from Europe’s debt crisis. Foreigners purchased a record net C$26.1 billion ($25.8 billion) of Canada’s bonds, stocks and money-market paper in May.
Canadian government bonds have underperformed their U.S. counterparts, returning 2.32 percent this year through July 19, compared with 2.56 percent for Treasuries. Canada’s benchmark stock index, the S&P/TSX Composite Index, has lost 2.8 percent so far in 2012, compared with an 8.4 percent rise in the U.S. S&P 500 index.
The nation’s merchandise trade deficit widened to the most in almost a year in May as energy exports fell while imports rose to a record, a July report showed. Businesses and consumers are unlikely to fill the gap as exports slow, said David Watt, chief economist at HSBC Bank Canada in Toronto.
“It’s just more difficult to see consumers and business investment carrying that burden of growth,” Watt said. “We know that net exports and government spending are not going to be carrying that burden.”
The Bank of Canada’s quarterly survey of executives showed that, on balance, companies intend to boost spending on machinery and equipment. The balance of opinion was 24 percentage points in the second quarter, unchanged from the prior survey and down from 30 percentage points a year earlier.
The central bank also reiterated “the persistent strength of the Canadian dollar” will restrain exports, which account for roughly one-third of gross domestic product. The currency declined 0.4 percent to 1.0118 per U.S. dollar.
“The net impact of lower oil prices on Canada is negative,” Carney told reporters at a news conference in Ottawa July 18. “It impacts investments, it impacts government revenues, it impacts incomes.”
Among companies scaling back investment plans is BCE Inc., Canada’s largest phone company. The company cut capital spending by 19 percent in the first quarter to C$817 million from the previous quarter, while auto-parts supplier Magna International Inc. cut spending by 53 percent to C$250 million.
Consumers, saddled with debts, have also shown signs of fatigue as job growth slows.
Retail sales have fallen in two of the past three months and were lower in April -- the last month data is available -- than at the end of 2011.
Canadians’ ratio of debt-to-income reached a record 154.3 percent in the first quarter as the U.S. ratio declined to 141.2 percent. Employment growth totaled 15,000 in May and June, slowing from 140,500 in March and April, the fastest back-to-back monthly increase in more than 30 years.
Finance Minister Jim Flaherty introduced changes on June 21 that will make it harder for some buyers to qualify for mortgages, undercutting another area of economic strength. The same day as Flaherty issued the new rules, the country’s banking regulator, the Office of the Superintendent of Financial Institutions, released tougher standards for mortgage lending.
Residential construction was the fastest expanding segment of the economy in the first quarter, according to Statistics Canada data, and was responsible for almost half of Canada’s 1.9 percent annualized growth rate.
Canadian existing home sales fell 1.3 percent in June from the previous month, the second straight monthly decline, the Canadian Real Estate Association said this week.
A slump in the country’s housing market driven by overbuilding by developers of condominiums will probably cause growth to be slower than the central bank expects in the second half of this year, said Jonathan Basile, a Credit Suisse economist based in New York.
“We’re going to start to see some drag coming from housing,” Basile said by phone from Toronto. “Once housing starts to turn, it won’t necessarily turn in a gradual or orderly fashion.”
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