Why the BoC sees just 1.8% growth in 2019

The BoC has revised down its growth forecasts, predicting 2017’s growth of 2.6% will slow in the ensuing years, reaching 1.8% in 2019.

While 2017 is performing stronger than expected, the bank held its benchmark rate at 0.5% while revising down 2018 growth to 1.9%, from the previous 2.1%.

“It’s largely demographics driving that,” says Brian DePratto, senior economist for TD, who sees it as a reasonable estimate. “The demographics are going to be weighing on the labour side of things. We just aren’t really seeing a whole lot in terms of investment or other measures to drive the productivity side of things.”

Lower potential

The BoC, in its monetary policy report on Wednesday, also lowered its outlook for the economy’s potential output, citing an expected decline in the working age population, lower employment and hours worked, and slow productivity growth.

That means the economy is expected to reach its full potential—albeit at a slightly lower marker—sooner. “With this combination of a higher profile for economic activity and a lower profile for potential, the output gap is projected to close in the first half of 2018, a bit sooner than the Bank anticipated in January,” the BoC says.

The bank’s range for potential output growth now has a midpoint of 1.4% for 2018 (down from 1.5%) and 1.5% for 2019 (down from 1.6%).

The number of retirees, who spend less, is growing, while households overall are deleveraging, says Darcy Briggs, vice-president and fixed-income portfolio manager with Franklin Bissett Investment Management in Calgary.

For clients who ask about a lower-growth scenario, Briggs tells them there are always cycles affecting the markets.

“Like every other cycle, it cycles. This is the bottom part. There’s opportunities that can be made in a lower-growth environment,” he says, pointing to opportunities linked to equity market gains, low interest rates and changing corporate bond spreads. “You just need to know what to look for.”

Read: The BoC’s unofficial lower-loonie policy

‘Decidedly neutral’

The BoC is “decidedly neutral,” BoC Governor Stephen Poloz said in Ottawa, noting there was no option for a cut in the latest decision.

“Given the data that we’ve seen in the last few months, I can say quite clearly, ‘No, a rate cut was not on the table at this time,’” Poloz said, after suggesting the possibility of a rate cut in January. Economists expect the bank to remain on hold through the year.

The BoC expects “a more moderate pace” for economic growth, with activity pulled along by foreign demand, federal fiscal stimulus and monetary policy.

Read: Hike gave Fed ‘more breathing room,’ says analyst

While Q1 2017 GDP growth is forecasted to be higher than previously thought, at an annualized pace of 3.8%, the gain is driven largely by strong household spending, higher oil prices and increased government expenditures. The BoC sees annualized GDP growth of 2.5% for Q2 2017.

It says final domestic demand has been weaker than projected as business investment declined and there were delays in government infrastructure spending. Business investment is “well below” expectations as Canadian firms are wary of increased trade protectionism, reduced competitiveness in corporate taxation and other regulatory changes in the United States, the BoC says.

“A notable increase in global protectionism remains the most important source of uncertainty facing the Canadian economy,” the report says.

Housing prices can go down, too

Household spending will moderate, the BoC projects, even as housing market activity remains strong in regions like Toronto. The fundamentals don’t justify Toronto housing prices jumping by over 30% in the past year, Poloz notes.

Read: GTA home prices jump 33% in a year

“It’s that gap, between what fundamentals could manage to explain, and what is actually happening, that suggests there’s a growing role for speculation in that [market]. In other words, demand is being driven more by speculative demand,” Poloz says. “I think it’s timely to remind folks that prices of houses can do down, as well as up.”

The federal government’s housing policy changes will dampen activity, the BoC forecasts, amid expectations for the market to slow given high levels of household debt and higher longer-term borrowing costs.

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