Canada: Q3 GDP growth may not be sustainable - Wells Fargo

The Canadian economy expanded at a 3.5% rate during the third quarter. According to analysts from Wells Fargo, the fastest quarterly growth in Canada in two years may not be sustainable. They see downward pressure on the Canadian dollar (against the USD) amid monetary policy divergence between the Bank of Canada (BoC) and the Federal Reserve.  

Key Quotes: 

“The fastest quarterly growth rate in two years is due in part to a bounce-back in oil exports. Although 3.5 percent growth may not be sustainable, there are signs of bottoming in business investment.”

“Canada’s economy grew at an annualized rate of 3.5 percent in the third quarter, which was faster than expected. A bounce-back in exports after wildfires in Alberta temporarily disrupted oil production in the second quarter was a key factor and one that we had been expecting.”

“We do not expect that 3.5 percent is a sustainable rate of growth for the Canadian economy at present. An over-levered domestic consumer, pockets of frothiness in home prices, a lack of conviction in business spending and soft global growth are the main reasons why we are forecasting GDP growth of just under 2.0 percent for 2017 and 2018.”

“Although the BoC has offered some mixed signals in terms of the future direction of policy, by its own estimate the output gap (the difference between actual GDP and potential GDP) has been negative since 2008. On that basis, we expect the BoC to remain on hold at least through the middle part of next year. With the Federal Reserve expected to raise rates between now and then, our currency strategy group expects continued downward pressure on the Canadian dollar.”