The Bank of Canada will start cutting its key lending rate in October as annual economic growth slows to one per cent in 2020, according to Capital Economics.
Stephen Brown, senior Canada economist at the London-based research firm, expects weak demand at home and abroad will prompt two additional cuts after October’s announcement, with little prospect of the central bank raising rates before 2022.
“Investors are right to price in lower interest rates from the Bank of Canada, but the single 25 basis point cut priced into futures markets for the next 12 months does not go far enough,” he wrote in a research note on Tuesday.
The oil and gas sectors lifted real gross domestic product by a better-than-expected 0.3 per cent in April, according to Statistics Canada. Analysts polled by Reuters called for a 0.1 per cent uptick.
The Bank of Canada remains optimistic that recent headwinds posed by weak energy prices, stagnant consumption growth and trade tensions are easing.
Brown said capacity constraints lessen the odds that oil and gas will pick up the slack for non-energy exports weakened by softer global demand.
“The big picture is that we expect GDP growth to drop below Canada’s potential in the second half of the year, causing the output gap to widen,” Brown wrote.
He predicts Canada’s economy will expand by a muted 1.3 per cent in 2019, and one per cent in 2020. The bank’s anticipated trio of rate cuts will then lift GDP growth to 1.7 per cent in 2021, he said.
“The outlook for the next few years is challenging, but Canada’s longer-term fundamentals are strong,” Brown wrote.
“The adoption of new technologies should drive a pick-up in productivity growth over the next twenty years. As that will more than offset a slowdown in labour force growth, we expect potential GDP growth to edge up to two per cent by the mid-2020s, from about 1.8 per cent currently.”
The Bank of Canada is scheduled to make its next rate announcement on July 10.