The increased expectation for rate hikes from the Bank of Canada, which many say was the most notable development in central bank policy this past quarter, is based on an increased perception of strength in the country’s economy. And that may be thanks to Canadian consumers and businesses.
“Currently markets are priced for the overnight rate to rise to 1.5% by the end of 2018, significantly more than the 75bps implied in June 2017,” said the Royal Bank of Canada (RBC) in its September economic and financial market outlook.
This happened as the Canadian economy accelerated past its growth potential in the second quarter of 2017. That was its fourth quarter of outperformance, which led RBC to revise its 2017 GDP growth forecast from 2.6% to 3.1%. For 2018, they’re projecting slightly above-potential growth of 2.2%.
Canadian consumer activity is going strong with steadily accommodative financial conditions and healthy hiring activity. While regulatory changes and slightly higher interest rates have begun to slow down housing activity, overall consumer spending will likely remain a key growth driver this year, and be less supportive in 2018.
Growth will also be supported by an expected improvement in business investment compared to the past two years. The first quarter showed the fastest growth in investment in almost five years, followed by continued strength in the second quarter. A survey by the Bank of Canada revealed a near-record level of planned investments in the year ahead. “Other encouraging signs include higher imports of machinery and equipment, rising machinery sales by Canadian companies and a pickup in hiring of engineering construction workers,” RBC said.
The government is also providing a valuable assist. From its $186 billion infrastructure fund, $9 billion is estimated to be put on tap this year.
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