Economists at Bank of Nova Scotia have lowered their forecast for the Canadian economy, and pushed out predictions for interest rates in response.
In a report published on Thursday, Scotiabank economists forecast 2.2% gross domestic product (GDP) growth in 2018, down from 3% growth last year.
The latest forecast is down a couple of ticks from Scotiabank’s prior forecast of 2.4% growth in 2018. However, the bank forecasts slightly stronger GDP growth in 2019, 2.1%, up from its previous call of 1.9%.
The revised forecast reflects its view that the spillover effects of U.S. fiscal stimulus will take longer than expected to impact the Canadian economy through increased export demand, Scotiabank says.
“Our revised growth projections also reflect two cross-cutting and largely offsetting sets of influences: Canadian economic activity does receive positive spillovers from U.S. fiscal stimulus, but this is counter-balanced by our presumption that investment is dampened by uncertainty stemming from the still-pending status of NAFTA, escalating U.S.-China trade rhetoric, and adjustment to the recent additional tightening of mortgage lending standards in Canada,” the economists say in the report.
Despite the expectations for decelerating growth over the next couple of years, inflation is still expected to pick up, the report says. As a result, Scotiabank economists continue to expect the Bank of Canada to follow a path to higher interest rates, with two more rate hikes in the second half of 2018, on its way to a key rate of 2.5% by the end of 2019.
“We continue to look for slowing, but still above- potential, growth to be met with two more increases in the Bank’s target for the overnight rate later this year — although somewhat more back-loaded than previously projected — and three more increases in 2019,” the report says.