UBS lowers estimates for Canadian GDP growth

George Vasic is expecting slower economic growth for Canada over the next couple of years.

In a report released Friday, the UBS Investment Research strategist explained that several of the temporary factors that have boosted growth of late (such as a jump in the savings rate) have “already run their course.”

Accordingly, UBS has reduced its growth outlook for Canada’s gross domestic product to 3.1% for 2010, down from a previous estimate of 3.5%. The investment bank expects GDP growth to slow further in 2011, increasing by just 2.8% compared to its former outlook of 3.2% growth for next year.

One GDP-limiting factor the report mentions is that inventories are now rebalanced relative to sales, “thanks to a C$15-billion swing that accounted for about one-third growth over the last year,” wrote Mr. Vasic.

He also pointed out what he called a “dark side” to the recent strength of the Canadian dollar on the currency markets. The effect of a high exchange rate for the loonie “has been the plunge in real net exports, which has now outweighed the boost from commodity prices and put the current account back into deficit,” wrote Mr. Vasic.

UBS also revised downward the pace of target rate increases it is expecting from the bank of Canada. Having previously anticipated the bank’s key target rate to be 2.50% by the end of 2011, UBS now expects a 2% rate to be in place at that time.

Though the report makes a point of stressing that the Canadian economy is still recovering at a good pace.

While noting that the savings rate increasing to 5.9% was “partly inflated by larger tax refunds,” Mr. Vasic went on to point out that the rate was “still high enough…to stop being a drag on consumption.”

The report also drew attention to the fact that “government and corporate yield curves, although gradually flattening, still appear consistent with a respectable recovery.” Mr. Vasic later mentions that both yield curves, which typically lead growth by about a year, are also “consistent with respective growth.”

Respectable sure, just a fair clip slower than we had all hoped.