CAD: Stimulus needed, but what kind will it be? – Nomura

FXStreet (Delhi) – Charles St-Arnaud, Research Analyst at Nomura, suggests that while investment is likely to remain a drag for Canadian economy while fiscal stimulus is awaited, which increases the possibility of a cut.

Key Quotes

“Recent growth indicators show that the Canadian economy is underperforming significantly, with growth likely to have been flat or even negative in the fourth quarter of 2015. Looking at the details by industry, we find that about 75% of the moderation in growth since December 2014 can be attributed to the adjustment to lower commodity prices and to the reduction in business investment.”

“We believe that business investment is likely to remain weak in 2016 and remain a drag on growth given the further decline in commodity prices in recent months, continued uncertainty regarding the global economy and the increase in the cost of capital goods coming from the sharp CAD depreciation. With growth faltering and likely to remain weaker than expected by the BoC, the probability of a rate cut has increased.”

“Moreover, after almost two months in power, the announcement of the size and details of the fiscal stimulus by the new federal government are still being awaited and one could start to wonder if the economy can wait the months it will need for the impact to be felt. The longer the announcement of fiscal stimulus is delayed the more likely the BoC will cut rates to provide a buffer, even though fiscal policy would be much more effective at stimulating the economy than monetary policy. While we still believe rates are likely to remain unchanged this year, we put the probability of a rate cut in the first half of 2016 at around 40%.”

“With the recent decline in oil prices and the underperformance of the economy, concerns are starting to emerge about the economic outlook for 2016. Moreover, given the reaction from the Bank of Canada to the expected impact on the economy of the decline in oil prices back in January and to the underperformance of the economy back in July, some market participants may start to think that the central bank could cut again in 2016. In this report, we look at the source of the recent faltering in growth, especially the business investment sector, and what it means for monetary policy.”

Charles St-Arnaud, Research Analyst at Nomura, suggests that while investment is likely to remain a drag for Canadian economy while fiscal stimulus is awaited, which increases the possibility of a cut.

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