* Growth forecast at 1.2 pct in 2016, 2.0 pct in 2017
* Bank of Canada expected to keep rates steady on Oct 19
* Rates forecast to rise to 0.75 pct in second quarter of
By Anu Bararia
Oct 13 A quarter of analysts polled by Reuters
pared back Canadian economic growth forecasts for this year and
next compared with three months ago, saying subdued energy
prices and soft U.S. demand will dampen the boost from expected
The Bank of Canada is therefore likely to keep interest
rates at low levels for even longer than thought to support the
economy, with analysts pushing out their expectations for a rate
hike to the second quarter of 2018.
Hurt by a drop in exports and a disruption in oil production
caused by wildfires in Alberta, the economy shrank in the second
quarter at the steepest rate since the global financial crisis.
Although the economy is expected to have recouped robustly
in the third quarter, analysts in the poll of over 40
respondents said the strong pace of its rebound will not carry
through to the remainder of the year.
The price of oil, a key Canadian export, is still down over
50 percent from its mid-2014 high of $116 a barrel, while demand
for the country's other exports remains tepid due to weak U.S.
Bank of Canada Governor Stephen Poloz has pinned hopes on a
non-energy export-led rebound in Canada, thinking that a
combination of a weaker currency and stronger U.S. demand would
make a potent mix.
Although the U.S. economy seems on a stronger footing now,
uncertainty around the upcoming presidential election and the
timing of the next Federal Reserve rate hike could continue to
weigh on demand for Canadian exports, despite a weak domestic
The poll forecast Canadian economic growth at 1.2 percent
this year, short of the bank's 1.3 percent estimate, and at 2.0
percent in 2017, versus the bank's 2.2 percent prediction and
July poll's median consensus of 2.1 percent.
"The energy sector is still suffering and I don't see light
at the end of the tunnel anytime soon, even if commodity prices
seem to be slowly creeping higher again," said Thomas Costerg,
senior economist at Standard Chartered Bank.
"There is some optimism around the U.S. economy but ... you
see signs the U.S. economy is not performing as well as it
should. There is still a big question mark."
LUKEWARM FISCAL IMPACT
To lend support to the Canadian economy, the Liberal
government in March projected a C$29.4 billion ($22.1 billion)
budget deficit for this fiscal year as it spends on
infrastructure and benefits for families and the middle class.
However, economists in the poll were wary of how much that
would help in boosting economic growth.
"Fiscal stimulus is a positive for growth, but it is a
modest positive. It is just a patchwork solution in the
meantime," said Emanuella Enenajor, North America economist at
Bank of America-Merrill Lynch.
Only three out of 19 analysts who answered an extra question
in the poll said the current fiscal stimulus would be effective.
Thirteen said it would be only somewhat effective, while the
rest said it would not be effective at all.
Canada's central bank cut rates twice last year, bringing
them to 0.50 percent, to dull the sting of the oil price crash.
The economy fell into a brief recession, nonetheless.
But lower rates prompted Canadians to take on even more
mortgage debt. The household debt-to-income ratio hit a record
high 167.6 percent in the second quarter, stoking fears of a
correction in the housing market.
Canada's economy is increasingly driven by housing, which is
a key risk going into 2017, said Standard Chartered's Costerg.
He added that the recent regulations to curb house price
inflation also pose a downside risk to economic growth.
House prices, especially in urban centers Toronto and
Vancouver, continue to scale new heights despite a brittle
economic outlook. In contrast, the pace of construction of new
houses is expected to slow over the coming year.
But with overall inflation remaining below the BoC's 2
percent target, and the economy still weak, a small minority of
economists said the central bank's next move will more likely be
a rate cut than a hike. Three forecast a trim this quarter.
($1 = 1.3290 Canadian dollars)
(For other stories from the global poll: )
(Editing by Nick Zieminski)