Canada's growth prospects this year have improved, according to almost half the analysts polled by Reuters who also said the Bank of Canada was right in being cautious in raising rates amid a lack of clarity on U.S. trade policy.
The economy will grow 2.1 percent this year and 2.0 percent in 2018, the poll of 38 analysts showed, an upgrade from the 1.9 percent predicted for both years in January's poll. It was forecast to have expanded 2.6 percent last quarter, matching fourth-quarter growth.
Expectations of stronger U.S. demand for Canadian exports, support from the government in the form of stimulus spending and prospects of higher commodity prices have brightened Canada's economic outlook.
However, the Bank of Canada will likely maintain its wait-and-see stance on monetary policy until early next year, the poll found.
Although there has been a fairly positive run of data recently, there are risks from protectionism in the United States, said Josh Nye of RBC Capital Markets.
"We still don't have much clarity on what U.S. trade policy might look like over the next year," he said.
U.S. President Donald Trump has vowed to renegotiate the North American Free Trade Agreement and is considering a border tax on imports that could severely hurt Canadian exporters, given Canada sends about 75 percent of its goods south of the border.
Following a collapse in the price of oil, a key export, Bank of Canada Governor Stephen Poloz shifted focus to a non-energy exports-led rebound, helped by a weaker currency and stronger U.S. demand.
Oil prices have almost doubled over the past year. Meanwhile the Canadian dollar is expected to weaken against its U.S. counterpart on prospects the Federal Reserve will tighten U.S. policy further and the Bank of Canada will stay on the sidelines. [CAD/POLL]
The Fed hiked interest rates in December and March whereas the BOC has kept rates steady at 0.50 percent after making two cuts in 2015.
Although that policy differential has weakened the Canadian dollar over the past three years, the central bank has noted exports continue to face competitiveness challenges. Recent data showed exports tumbled by the most in nearly a year in February.
Economists said demand for Canadian exports could possibly fall further if Trump delivers a protectionist agenda.
Though recent stronger-than-expected data and rate hikes in the U.S. have prompted some expectations for an early hike in Canada, Poloz said last week a premature rate rise could send the economy into a recession.
On an extra question in the poll, a majority of respondents said the central bank was right in looking past recent signs of improvement in the economy and pegged U.S. trade policy as the biggest risk to Canada over the coming year.
Lackluster export growth in a low-rate environment could increase household borrowing in Canada and make a decline in the housing market, where much of the debt is invested, more painful, economists said.
An average Canadian household owed C$1.67 for every dollar of disposable income in the third quarter.
"Meanwhile, we now have provincial policymakers threatening to intervene in the largest housing market, Toronto, which has already peaked, and so there is an even greater risk of a downturn in housing investment," said David Madani, economist at Capital Economics.
Oil prices could also ease again. Although steady at around $55 a barrel, oil is far from its mid-2014 high of $116, with commodity analysts unsure if recent supply cuts from key producers will be enough to offset increased U.S. production. [O/POLL]
As it waits to see what impact the U.S. administration's still-evolving policies will have on Canadian competitiveness and trade, the Liberal government offered little new stimulus in its second budget after unveiling a large infrastructure spending plan last year.
It did set a target to boost exports by 30 percent over the next eight years, which nearly one in two forecasters who answered an additional question said was too ambitious.
"That would require some really substantial progress on forming new trading relationships and that would have to happen very, very soon," said Madani. "Given the concerns we have about U.S. trade protectionism, it really only ups the ante."
(Polling by Kailash Bathija; Editing by Ross Finley and Meredith Mazzilli)