Canada’s economy is diverging as Bay Street gains amid more difficult broader conditions, according to one head of fixed income, after the release of better-than-expected first quarter gross domestic product (GDP) numbers.
First quarter GDP came in at 2.2 per cent on an annualized basis, compared to 2.1 per cent in the previous quarter, which was downwardly revised. The positive figures were mainly due to higher exports as U.S. companies looked to stockpile goods ahead of the implementation of tariffs. Earl Davis, head of fixed income and money markets at BMO Global Asset Management, said in an interview with BNN Bloomberg Friday the higher levels of growth are not likely to be sustained during the second half of the year following the implication of tariffs.
“One of the things that I find interesting about the number, obviously it’s supportive of equities, new highs, dollar, we’ve seen the dollar bounce; but what we’re getting in in Canada is a tale of two streets. One is Bay Street (with the) TSX, dollar, and the other is main street. Housing is down; employment is down. We do expect a slowdown in growth,” Davis said.
“So how does the Bank of Canada balance that when their only mandate is inflation?”
Ahead of the Bank of Canada’s upcoming interest rate announcement next week, Davis said the central bank will have to consider core inflation, its preferred inflation metric, along with lower levels of employment that could affect future demand.
“So how does the Bank of Canada balance actual CPI and core, which is their mandate, versus what they see as potential inflation going down a year from now. And that’s why the market only thinks it’s a 25 per cent chance of an ease at the next meeting next week. But we think it will be more going forward,” he said.
Going into June and July, Davis said he is expecting growth concerns due to U.S. tariffs, resulting in the central bank lowering interest rates to around two per cent by the end of the year from the current rate of 2.75 per cent.
Recession?
Overall, Davis said Canada’s economy is in a “good place” and that he doesn’t currently expect a recession this year or next year.
“That’s because the U.S. is still doing well. We’re still in the export economy. There’s been global eases around the world. Europe’s easing, U.K. is easing, that benefits Canada from an export perspective. So, there’s a lot of things happening outside of Canada that says, ‘you know what, (I) don’t think we’ll get a recession,’” he said.
“We’ll get lower growth. And that’s what the Bank of Canada is looking at and trying to analyze.”
With files from Reuters.
