What Canada’s Central Bank is Predicting

As expected, the Bank of Canada doesn’t seem to be in the mood to increase interest rates. According to the latest Canadian economic data, inflation is well within tolerable boundaries, while the overall economy is expected to continue growing in 2007, albeit at a modest, and thus reasonable, rate.

The Bank of Canada has cut down the country’s average annual GDP growth for this year from 2.5% to 2.3%. A small cut, but a cut nonetheless. However, by 2008, the pace of our economic growth could rebound to a hearty 2.9%. Let’s hope so!

This prediction from Canada’s central bank is based on expectations that factors, which contributed to the economic slowdown in 2006, will dissipate and/or adjust during the first quarter of 2007. Among other factors, in 2006, there was evidently softer demand from the U.S. for building materials and cars. As a result, building and car inventories in Canada built up to the point of bursting. Thankfully, the impacted vendors are already seeing the first signs that inventories are adjusting, and they’re shipping the stuff out at a faster pace.

Also helping our economy are healthier projections coming from our American neighbors. The Fed has pegged the U.S. economy growth rate for 2007 at 2.5%. Considering that Canada’s GDP rose only 1.7% in the third quarter of 2006 and 1.5% in the fourth quarter, we have pretty much hit rock bottom. From here on in, things are likely only to get better.

The biggest driver of GDP in Canada is domestic spending. However, continued weakness in trade with foreign partners is bound to put a certain amount of unwanted pressure on the economy’s growth.

The most optimism is coming from the “inflation department.” Apparently, the Bank of Canada expects total inflation to align with core inflation. Note that the difference between the two is that core inflation does not account for the volatility of food and energy prices. And, while our daily lives are more impacted by total inflation, what governs the overall monetary policies is core inflation. Note that, in recent months, total inflation in Canada amounted to about 2.2%, and it is expected to drop back to about 2.0% by the end of 2007.

I know I’ve harped on Canada’s economic outlook before, but it never hurts to receive one more confirmation.