GDP growth forecast revised down and BoC expected to shift into neutral
HSBC are making two key changes to our economic forecasts. First, HSBC is revising their forecast of GDP growth for 2019 down to 1.1%, from our prior forecast of 1.6%. Second, they now expect the Bank of Canada to remain on hold, leaving the policy rate unchanged at 1.75% this year, and marking an end to the tightening cycle. "Their prior forecast was that the policy rate would rise to 2.25%.
Their forecast of a more moderate growth trajectory follows weaker than expected GDP growth of only 0.4% GDP in 2018 Q4. However, it was the details of the report, notably the softness in domestic demand, that convinced them to lower our forecast. In the quarter, investment fell in all key categories. As well, consumption and housing were weaker than expected due in part to slower income growth, and the impact of higher interest rates.
There are also signs that economic growth remains moderate in early 2019, with manufacturing activity cooling off, consumer confidence at a three-year low, and slower job and wage growth. As a result, we now forecast 2019 Q1 GDP growth of 0.3%, compared to our prior 1.6% forecast.
In 2019, HSBC anticipate business investment will decline by 2.1%, down from our prior forecast for growth of 1.0%. Although some of the North American trade tensions eased with the signing of the Canada-US-Mexico agreement (CUSMA, or USMCA in the US, and T-MEC in Mexico), there remain other trade concerns that are weighing on business investment.
Meanwhile, HSBC also anticipate that competitive challenges will continue to limit export growth, and that inflation will remain moderate, with limited upside risks given the modest growth backdrop.
Given the economic headwinds, they expect the Bank of Canada to leave the policy rate at 1.75% through year-end. They look for the Bank to eventually adopt a neutral policy stance, suggesting that the next policy move could be an increase or a decrease. They think that the tightness of the labour market was a key reason that the Bank did not already adopt a clear neutral stance at the 6 March policy meeting.