Canadian economic growth to stay subdued; inflation near target: Reuters poll

BANGALORE Thu Jul 17, 2014 10:47am EDT

The closing down Sears store is shown in downtown Vancouver, British Columbia September 13, 2012.    REUTERS/Andy Clark

The closing down Sears store is shown in downtown Vancouver, British Columbia September 13, 2012.

Credit: Reuters/Andy Clark

BANGALORE (Reuters) - Canada's economy will grow a bit more slowly than previously thought over the next two years, a Reuters poll found, but economists expect inflation to stay near the central bank's 2 percent target.

The poll of 34 economists taken in the past week pegged economic growth this year at 2.2 percent, down a notch from 2.3 percent in an April poll. High household debt and low wage increases are expected to restrict consumer spending, a key to growth.

The poll showed expectations of growth picking up only slightly to 2.5 percent in 2015, compared with the Bank of Canada's latest forecast of 2.4 percent, and to 2.6 percent in 2016, versus the central bank's outlook of 2.3 percent.

The April poll showed economists were expecting growth of 2.6 percent in 2015 and 2.7 percent in 2016.

Should the Reuters medians prove right, Canada will outperform the United States this year but lose its lead in 2015 as growth in the world's largest economy accelerates to 3.0 percent.

Canada's economy faces considerable challenges, said David Tulk, chief Canada macro strategist at TD Securities.

"This just means the path or the road to healing is just that much longer," Tulk said. "As the labor market generally cools, we are getting quite subdued wage growth, and that contributes to a slower pace of consumer spending."

With unemployment likely to stay close to 7 percent this year and next, a lot rides on exports and businesses' taking over the baton from consumer spending and the housing market, something that has yet to happen.

"While export and investment growth should improve somewhat, this won't be enough to counter an outright decline in housing investment and slower growth in household consumption," economists at Capital Economics wrote in a report.

In a separate Reuters poll last week, fragile growth was listed as one of the biggest reasons why the central bank is unlikely to hike interest rates until late next year.

The central bank left its key policy rate unchanged at 1.00 percent on Wednesday, as predicted, and pushed back its expectations for when the economy would reach full capacity.

The bank also said the risk of a downward drift in inflation expectations had diminished.

Economists also appear to think Canadian inflation will stay near target, even after the May number came in above expectations and hit a 27-month high of 2.3 percent, a spike the central bank expects to be temporary.

The latest Reuters poll shows economists expect inflation to average 1.9 percent this year and next and hit the central bank's 2 percent target in 2016.

The median forecasts for construction on new homes were also higher than in April, suggesting the housing market will pick up after a cooler start to the year.

Economists increased their expectations housing starts to 183,900 homes this year from 176,700 in the previous poll and to 178,000 next year from 172,000. Still, some said risks to the housing market remained.

"Housing affordability is a problem now and will worsen as interest rates nudge higher in the coming years," said David Madani, Canada economist at Capital Economics. "Overall, weaker demand and oversupply will lead to a major housing correction over the longer-term."

(Polling by Anu Bararia; Editing by Lisa Von Ahn)

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