2017's Top-Performing G-7 Economy Is About to Shrink: Macquarie

  • Outlook justifies “maximum underweight” of Canadian assets
  • Goods trade to subtract up to 3 percentage points off growth

Torrid second-quarter growth of 4.5 percent belies what’s coming up next for the Canadian economy: an outright contraction.

That’s the view of Macquarie Capital Markets analyst David Doyle, who’s calling for the fortunes of the fastest-growing Group of Seven economy so far this year to reverse sharply in the third quarter.

“Increasing evidence of softness in 3Q reinforces our conviction to maximum underweight Canada, particularly its banks and domestic focused consumer stocks,” the analyst writes.

It’s a call that’s far out of step with consensus. Doyle’s peers surveyed by Bloomberg are calling for growth of 2.5 percent; the Bank of Canada’s looking for an expansion rate of almost 3 percent. The analyst also expects the Bank of Canada to keep interest rates at 1 percent for the foreseeable future, while forwards imply that more than two hikes over the next twelve months are priced in.

Trade in goods will be the proximate cause of the shrinking economy, according to Doyle, shaving up to a whopping 3 percentage points off quarterly growth. The nation’s top two export segments -- energy and autos -- have come under pressure in recent readings, with shipments abroad retreating at the fastest pace since the 2009 recession in the three months through August. 

Ownership transfer costs will serve as an increasing drag on activity, with home sales volumes retreating at a faster clip than in the previous three months, he notes.

“We believe the above factors are likely to keep the BoC on hold,” he writes. “A hike would make us more cautious about the 2018 outlook and increase the possibility of our downside scenario materializing (a made in Canada recession) rather than our base case (a prolonged period of subdued growth).”

Citigroup’s economic surprise index for Canada has dipped to its lowest level in more than three months amid persistent disappointments on trade and flat growth for July, a month which also saw a sizeable drop in manufacturing sales.

The GDP reading is due out Dec. 1.

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