Fitch upgrades growth forecast for Canada-IE

Stronger-than-expected growth has Fitch Ratings boosting its forecast for the Canadian economy in 2017.

In its Global Economic Outlook published on Monday, the rating agency say it now expects Canadian gross domestic product (GDP) growth to reach 3.1% this year, up from its previous call of 2.4% in its June forecast. The bump up in the outlook follows growth in the second quarter, which came in at a 4.5% annualized rate.

While this “surprising strength” in the economy is behind Fitch’s revised forecast, the rating agency still expects that Canada’s GDP growth will slow towards trend in 2018-2019. “Growth is likely to decelerate,” the Fitch report says. “Economic output is now close to potential.”

The revised outlook for Canada is reflected in Fitch’s view of the global economy overall. At the global level, the world economy has “improved markedly this year and is on course to record its fastest expansion since 2010,” the Fitch report says, but it also cautions that “the current favourable mix of strong growth and highly-accommodative macro policies could be as good as it gets.”

Fifteen of the 20 countries covered in the report saw better-than-expected GDP performance in the second quarter, and that in several cases, including Canada, Russia, Turkey and Poland, the upside surprises were large. As a result, the rating agency has bumped up its forecasts for growth in 2017 for 13 countries, and increased its 2018 forecasts for seven countries. Indeed, Fitch’s overall global growth forecast for 2017 has been upgraded to 3.1%, up from 2.9% in June, and its 2018 estimate has been upgraded to 3.2% from 3.1%.

“Our forecasts imply something of a ‘sweet spot’ for the global economy in 2017 and 2018 with above-trend growth and still highly accommodative global monetary policies. However, this is not a pattern we expect to persist into 2019 and beyond as output gaps close in advanced economies and monetary policy support is withdrawn,” says Brian Coulton, chief economist at Fitch, in a news release.

Looking further out, the growth potential in the advanced economies “will be dampened by deteriorating demographics and sluggish productivity growth,” the Fitch report says.

Already, current rates of GDP growth are well above its estimates of growth potential in most major advanced economies. “This implies that spare capacity is diminishing and has implications for policy support as current expansionary settings will become harder and harder to justify,” the report says.

“With the Fed having now announced the start of the process of unwinding quantitative easing and the ECB likely to phase out asset purchases by the middle of next year, central banks in other advanced countries are also now contributing to a shift in the mood music surrounding global monetary policy,” adds Coulton.

Additionally, the report notes that geopolitics has re-emerged as a key risk. “The implications of North Korea tensions will be important to monitor, including for U.S.-China relations in the context of the US administration’s concerns about the US-China bilateral trade deficit,” it says. “Eurozone fragmentation risks have fallen since the beginning of the year but forthcoming Italian elections could see eurosceptic arguments regaining prominence and a further sustained escalation in tensions between the Catalonian and Spanish government could imply some downside risks for Spain’s recent impressive growth performance.”