Bank of Canada Upgrades Expectation of Canadian Economic Growth
global economic outlook
• The Bank of Canada upgraded its global and Canadian economic growth outlook since October in their
latest Monetary Policy Report (MPR). The BoC now expects real GDP growth to be 2.4% in 2011 and 2.8%
in 2012, up from 2.3% and 2.6%, respectively.
• Very little has changed regarding the breakdown of the outlook for domestic demand – as in the October
MPR, consumer spending growth is still expected to be restrained owing to the high level of indebtedness
among households, government spending is expected to ratchet back with announced budget plans, and
business investment should be a major contributor to overall real output growth due to a variety of fiscal
incentives and supportive macroeconomic factors.
• The most significant change to the forecast lay in recent developments regarding global demand. The Bank
cited faster-than-expected growth in Europe, the U.S., and emerging markets, which were positives for the
outlook for Canadian exports given overall stronger demand and higher commodity prices. In particular, the
Federal Reserve’s second round of quantitative easing and the Obama administration’s recent tax package
are both expected to bolster U.S economic growth over the next two years. The BoC estimates that they
will add 1.0 percentage point to growth in 2011 and 0.3 percentage points in 2012; in turn, this should boost
Canadian output growth by 0.2 percentage points in 2011 and 0.1 percentage points in 2012.
• This growth profile is still consistent with the output gap closing by the end of 2012, as was the case in
• Little was changed regarding the Bank’s expectation for headline and core inflation relative to the October
forecast, as well. Core inflation was very marginally downgraded in the first three quarters of 2011, while
headline inflation was boosted in 2011 reflecting a slight upgrade to the Bank’s expectation of crude oil
• The upgrade to the BoC’s forecast is unsurprising given recent signs of renewed strength in global growth
reflected in TD Economics’ own forecast in December. While we are slightly more optimistic regarding 2011
economic prospects, expecting 2.6% vs. the BoC’s 2.4% forecast, we remain less optimistic about 2012
(2.5% vs. the BoC’s 2.8%).
• Our inflation outlook is roughly consistent with the Bank’s and we both anticipate a return to the 2.0% target
for core inflation by the end of 2012, consistent with the closing in the output gap.
• The key takeaways in today’s report were in the risks highlighted by the Bank. In total, only two issues were
mentioned, but both had opposite implications for monetary policy. On the one hand, high household
indebtedness and on the other, an elevated Canadian dollar. The former would augur for faster rather than
slower rate hikes to halt the rising vulnerability among household balance sheets. However, the latter would
benefit from keeping interest rates lower for longer given that the U.S. has now embarked on further
unconventional monetary easing and exacerbating the existing short-term interest rate disparity between
the two countries would only cause further stress on the net export sector.
• Indeed, the Bank has been worrying about household debt and what would happen to households once
interest rates resumed their inevitable normalization, but has been loathe threatening the economic
recovery by raising interest rates too quickly.
• Yesterday’s announcement of new mortgage lending rules will likely ease some of this pressure off of the
BoC and solidifies our expectation that the hiking cycle will not resume until the second half of this year.
Our expectation is for an Overnight Rate of 2.00% by the end of this year and 3.00% by the end of 2012.