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Canadian economic growth is expected to dip next year thanks to higher interest rates and a slowdown in the housing market, according to one of Canada’s big six banks.
This year, Canada’s economy is anticipated to continue its above-trend growth by 3.1 per cent — the best growth rate seen since 2011, TD Bank’s economics team writes in its Canadian Quarterly Economic Forecast, published today.
However, the second half of 2017 has seen a pullback in the economy’s growth rate which is expected to continue into next year and 2019.
"We're still getting fairly respectable growth rates. It’s just not the kinds of really "eye popping" growth that we saw over the first half of the year. It's very hard to envision that continuing,” Brian DePratto, senior economist for TD Bank, tells BuzzBuzzNews.
Next year, TD forecasts that growth will moderate to a “respectable” 2 per cent and in 2019 will decelerate to 1.7 per cent, near the long-run growth rate trend.
Except TD says the economy is not so easy to predict, with looming risks that could throw the growth trajectory off course, including the housing market.
Over the first half of 2017, the Canadian economy was driven by consumers with the help of healthy job market and wage gains.
However, TD believes the “wealth effect” of past gains in housing and other forms of household wealth also played a key role in boosting consumer spending.
Housing activity in Ontario is an example of how the “wealth effect” is propelling consumer behaviour.
According to TD, over the past few years home prices in Ontario have been skyrocketing and, in turn, retail sales have exceeded the national average, despite average employment gains in the province.
With the introduction of the Ontario government’s Fair Housing Plan in April to cool the Greater Golden Horseshoe region’s market, a slight correction in market activity was observed, impacting the course of the national economy.
“If we do see a little more weakness there [Ontario], given we had all that strength coming out of the consumption from housing wealth, that sort of takes away one of the big drivers for the economy,” says DePratto.
Ontario isn’t the only market where consumer spending from the “wealth effect” is expected to fade over time, BC is also expected to see a decline.
This, combined with expected higher borrowing costs, are key reasons for TD’s forecast noting a decline in the economy’s growth rate next year.
The Bank of Canada increased its overnight rate, which influences the mortgage market, twice this year. Now sitting at one percent, the rate went up 25 basis points in July and September — the first time the central bank hiked the rate in seven years.
TD expects the Bank of Canada to further dial up the rate to 1.75 per cent by the end of 2018, calling it a “mounting headwind” for slowing the economy.
However, the reaction from highly indebted households to rising borrowing rates is an unknown factor that cause the Bank of Canada to waver on its decision to hike the rate, says TD.