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The Canadian economy is likely to grow strongly around 1.5 percent for the whole of 2016 as the shortfall in oil production will be offset in the third quarter, noted Commerzbank in a research report.
The economy is expected to be underpinned by the reconstruction activity in Alberta. However, the Bank of Canada assumes that the economic growth might contract in the second quarter of 2016 after growing decently at the pace of 0.6 percent quarter-on-quarter in the first quarter. The growth rate in Q1 was just marginally below the central bank’s projections of 0.7 percent.
The wildfires in Alberta have impacted the second quarter’s economic outlook significantly as a result of shortfalls in oil production. Meanwhile, the Canadian dollar has strengthened markedly against the US dollar since the beginning of 2016 so that the positive impacts of a weak currency are starting to diminish.
Furthermore, the US economy, which is Canada’s vital export market, had weakened in the beginning of 2016.
Industries outside of oil and gas sector are developing decently. However, the ongoing structural changes away from the earlier key energy sector are expected to decelerate the Canadian economy for some time. But the rebound in Canada’s economy is expected to continue in the coming years.
Weakness seen in the US was just transitory. Furthermore, oil price is expected to increase in the medium term, according to Commerzbank. Moreover, fiscal policy is likely to underpin the economy in the future. The new government under Prime Minister Justin Trudeau plans considerable government spending in its budget.
Meanwhile, unlike its peers, Canada does face the issue of very low inflation. At present, the nation’s inflation rate is within the Bank of Canada’s target band at 1.5 percent. The core rate, excluding volatile components, has continued to stay above the target rate of 2 percent since August 2014. The Bank of Canada believes that risks to the inflation outlook are balanced.
