Given the strong growth posted by the Canadian economy in January (GDP up 0.6 percent month-on-month), it's something of a surprise to find the IMF downgrading its growth expectations for the full year. The fund is now looking for GDP to grow only 1.5 percent this year -- barely above last year's 1.2 percent, when the media were full of talk of a "technical recession" -- with modest further acceleration to 1.9 percent in 2017.
Multinational bodies like the Fund are notorious for the slow process by which they produce their forecasts. It's very likely that this downgrade reflects the situation back at the start of the year, when oil prices were low, the Canadian dollar was at rock bottom and there was no sign that the "rebalancing" of the economy hoped for by the Bank of Canada was anywhere in sight.
What with the January growth number, strong March employment data and evidence of a recovery in manufacturing exports, things look rather different now. Certainly that's how the markets see things, with the Canadian dollar today trading north of 78 cents (US), its highest level in more than nine months.
All this sets the stage for the Bank of Canada's monthly rate setting meeting on Wednesday. We can expect Governor Poloz to offer his opinions on the recent Federal budget, which appears to take some of the weight off of monetary policy in terms of getting the economy onto a stronger growth track. Poloz is also likely to suggest, politely of course, that the government's ultra low growth forecast (just 0.4 percent per year) is almost certain to be overshot by a considerable margin. At the same time, he is likely to signal that rates will remain at current levels for the next year or so -- and the updated IMF forecast, if nothing else, gives him fresh justification for the Bank's cautious approach.
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