This week’s news was positive. The Bank of Canada maintained their current 1% interest rate policy. More importantly, the underlying data for the country is very strong. The ECB halved their bond buying program while maintaining rates at their current level. Other news from the EU supported the ECB’s rosy assessment of the economy. Finally, the UK economy grew at a modest pace.
The Bank of Canada maintained their current 1% interest rate policy at their latest meeting. Their policy contained a very positive assessment of the Canadian economy:
Canada’s economic growth in the second quarter was stronger than expected, and was more broad-based across regions and sectors. Growth is expected to moderate to a more sustainable pace in the second half of 2017 and remain close to potential over the next two years, with real GDP expanding at 3.1 per cent in 2017, 2.1 per cent in 2018 and 1.5 per cent in 2019.
Recent GDP data corroborate the Bank’s rosy opinion. In the latest report, consumer spending on durable goods was up 8.2%, non-durable goods spending increased 2.6% and service spending rose 2.9% (all figures Y/Y). Business spending advanced 1.1% with machinery spending moving 2.1% higher. Exports – a key to Canadian GDP – were up 5.7%. Better yet, inflation is contained:
It’s difficult to see the BOC raising rates much higher in the current environment.
In their latest policy announcement, the ECB announced they would halve their bond buying program next year:
Second, as regards non-standard monetary policy measures, we will continue to make purchases under the asset purchase programme (APP) at the current monthly pace of €60 billion until the end of December 2017. From January 2018 our net asset purchases are intended to continue at a monthly pace of €30 billion until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase the APP in terms of size and/or duration.
For the last year, the bank has noted loans in the EU area have increased. It’s likely the bank believes current loan growth – which was reported this week to have increased at a 2.5% pace to households and 2.7% to businesses – is close to a self-sustaining level.
The ECB offered a very positive view of the underlying economy:
Let me now explain our assessment in greater detail, starting with the economic analysis. The economic expansion in the euro area continues to be solid and broad-based. Real GDP increased by 0.7%, quarter on quarter, in the second quarter of 2017, after 0.6% in the first quarter. The latest data and survey results point to unabated growth momentum in the second half of this year. Our monetary policy measures have facilitated the deleveraging process and continue to support domestic demand. Private consumption is underpinned by rising employment, which is also benefiting from past labour market reforms, and by increasing household wealth. The upswing in business investment continues to benefit from very favourable financing conditions and improvements in corporate profitability. Construction investment has also strengthened. In addition, the broad-based global recovery is supporting euro area exports.
Like the BOJ, the ECB uses a flow of funds analysis for the economy: lower unemployment increases wages which supports higher spending and higher business profits increase investment. All of these developments are currently occurring in the EU. The only other news from the EU was the flash Markit number, which was also strong. Manufacturing was at an 80-month high of 58.6; service growth declined .9 to a still healthy 54.9; the composite reading was 55.9. New orders, backlogs and export orders all increased at strong rates.
The only news from the UK was their first analysis of 3Q GDP, which rose .4% Q/Q, 1.5 Y/Y. All sections of the economy added to the increase (all figures Y/Y): services +1.5%, manufacturing 2.7% construction 2.8%.
This coming week we’ll hear from two central banks: the BOJ on Monday and BOE on Wednesday. We’ll also see a slew of information from the EU, including inflation and unemployment. The BOJ will released their latest quarterly report, while will contain a good overview of the Japanese economy. We’ll also get GDP and unemployment information from Canada.