Canadian economy to pick up in Q3, BoC to maintain accommodative monetary policy for some time

Canada’s economy had begun expanding robustly into the year; growing 0.6 percent sequentially in the first quarter, but it contracted 0.4 percent in the next quarter. The contraction was predominantly because of oil production downtime, which was due to wildfires that weighed on exports. However, the decline was more evident than the Bank of Canada had anticipated.

Given that the production has restarted, the Canadian economy is expected to pick up again in the third quarter, noted Commerzbank. Furthermore, reconstruction work in the province of Alberta, impacted by the wildfires, along with a more expansionary fiscal policy is supporting growth. But given the subdued exports as a result of muted external demand, the Canadian economy is unlikely to be rebounded in the third quarter as strongly as the Bank of Canada initially anticipated. Now the central bank foresees just 0.5 percent rise sequentially.

Last year, the Canadian central bank lowered the interest rates in an attempt to protect the economy from the impacts of the oil price shock and to help structural changes in the economy away from the oil sector.

That signifies that its positive outlook is mainly based on exports outside the oil sector rising, stated Commerzbank. But as exports had weakened quite markedly in the second quarter and are rebounding more slowly than anticipated, the BoC appeared a bit more wary in regards with its outlook during its last meeting. While domestic consumption is expected to continue with its satisfactory development, the outlook for business investments is uncertain according to BoC.

Furthermore, the Canadian central bank is worried regarding weaker than anticipated export growth because of muted external demand. This has resulted in a downward revision of its 2016 growth projection during its October meeting. The central bank projects Canadian economy to expand just 1.1 percent this year.

The BoC is expected to keep its accommodative monetary policy for certain time. As the economic growth is expected to expand sufficiently in the second half of this year, the central bank is unlikely to lower its key rates further, according to Commerzbank.