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The coming week looks set to be dominated by central banks as policymakers in Europe, Canada, Australia and Japan gather for their corresponding policy meetings. Economic data shouldn't escape the headlines however as Australian GDP, Chinese trade figures and US and Canadian jobs reports will be eagerly awaited. However, early in the week, politics will be setting the mood, particularly for the euro as Italians go to the polls to vote for a new government on Sunday and Germany's SPD party publishes the results of the postal vote by its members on whether to approve the coalition deal struck with Chancellor Merkel's CDU party.

Important week for Australian dollar

Fourth quarter growth figures and the Reserve Bank of Australia's policy meeting will put the spotlight on the aussie next week but there will also be plenty of other data out of Australia to keep aussie traders busy. The week will start with January building approvals and Q4 business inventories on Monday. After this week's disappointing capital expenditure numbers, another weak reading of a GDP component would raise the risk of a negative surprise in Wednesday's growth figures. On Tuesday, January retail sales will be watched to gauge the strength of Australian consumer spending at the start of 2018, while the net exports contribution for Q4 will be the final barometer for the GDP release the following day. Rounding up the week will be January trade numbers on Thursday.

Australia's economy is forecast to have expanded by 0.6% quarter-on-quarter in the final three months of 2017, the same rate as in the prior period. The RBA will likely already have a sneak preview of the GDP data when it meets on Tuesday. The central bank is widely expected to keep its cash rate unchanged at 1.5% as inflation and wages remain subdued. Weak GDP growth could prompt the RBA to tone down its recent upbeat view but will likely take comfort from the aussie's 5% slide versus the US dollar from January's 2½-year high.

Apart from domestic factors, the aussie could face additional volatility coming from Chinese indicators. The latest trade data out of China on Thursday will be eyed to see how exports and imports withstood the long Lunar New Year holiday in February. Friday's consumer and producer prices indices could also show some impact from the new year celebrations.

Bank of Canada and employment report may add to loonie's woes

The Canadian dollar slid to a 2-month low this week, with USD/CAD breaking above the 1.28 level as the US currency regained some positive momentum. While the February jobs figures may provide the loonie a helping bump up, the Bank of Canada meeting poses a downside risk. The Bank of Canada's latest policy decision is due on Wednesday and after three rate hikes in the past eight months, the Bank could be headed for a pause. The latest data for January was mixed with employment and retail sales numbers missing estimates by a wide margin but inflation unexpectedly picking up. Comments from BoC policymakers have been more cautious of late and markets are not fully pricing in another rate hike until July. If the BoC reiterates its data-dependent view, the loonie may continue to drift lower. However, a robust employment report on Friday could go some way in bringing rate rise expectations forward to May.

No surprises expected from Bank of Japan

The Bank of Japan will be another central bank holding a monetary policy meeting in the next seven days and like the RBA and the BoC, it is not expected to make any tweaks to its policy even as the Japanese economy continues to improve. There will be more evidence of this strength on Wednesday when revised GDP figures for the fourth quarter are released. GDP growth is forecast to be revised upwards from 0.5% to 0.9% on an annualized basis. However, with corporate Japan unwilling to pass on higher earnings to employees, there's been insufficient progress in wage growth and consumer price inflation for the BoJ to start reducing its massive stimulus program. An appreciating yen over the past month also stands in the way of this progress, though BoJ Governor Haruhiko Kuroda has already started to look ahead with recent talk of policy normalization. Such language is unlikely to be included in Friday's decision statement however, when the Bank concludes its two-day policy meeting. The BoJ is expected to maintain rates at -0.1% and the target on 10-year Japanese government bond yields at 0%.

ECB to drop easing bias?

The European Central Bank will be among next week's highlights as it holds its March policy meeting. Economic data will not be sparse but are unlikely to generate significant moves in the euro. The Eurozone sentix index, final Markit PMIs and retail sales figures will kick-off the week on Monday. On Wednesday, the third estimate of Q4 GDP growth is published but no revision to the prior 0.6% q/q reading is being forecast. German data will also attract attention with industrial orders due on Thursday, and industrial production and trade numbers out on Friday (all for January).

Markets' focus will instead be ECB President Mario Draghi's latest views on the Eurozone economy and inflation at his post-meeting press conference on Thursday. No change in policy is expected from the ECB but a tweak in the Bank's statement is possible according to a Reuters report citing ECB sources. The farthest the ECB is likely to go this month is to drop its pledge to increase its asset purchases if necessary, with a bigger decision on updating the Bank's forward guidance not anticipated before April.

Flash CPI estimates out this week showed euro area inflation slowed to a 14-month low of 1.2% in February, supporting the case for a very gradual exit from QE. The single currency could retreat further from last month's 3-year peaks if Draghi repeats the dovish stance when he testified before the European Parliament earlier this week.

UK services PMI unlikely to inspire sterling

After sliding to a 7-week low just above $1.37, the pound may struggle to find much support from the few data releases coming out of the UK next week. Services activity is expected to edge up marginally in February, with the Markit/CIPS PMI rising from 53.0 to 53.3 on Monday. Industrial and manufacturing output will be the next major data on Friday. After a sharp slowdown in December, both indicators are forecast to rebound in January. Industrial production is expected to jump by 1.1% month-on-month in January, while manufacturing output is forecast to grow by 0.2% m/m. January trade figures are also due on Friday.

US pay growth back in focus

Just as markets were beginning to recover from the turmoil set off by the stronger-than-expected wage growth figures in January's US jobs report, President Trump's decision to impose steel and aluminium tariffs has cast fresh cloud over the outlook, putting markets in a vulnerable footing from any surprises in Friday's nonfarm payrolls report. Ahead of the jobs data, the ISM non-manufacturing PMI for February will be eyed on Monday, followed by January factory orders on Tuesday and the trade balance on Wednesday.

February's jobs report is expected to show another month of solid gains in nonfarm payrolls, with a consensus of 190k jobs being added to the US economy. The unemployment rate is forecast to tick down to 4.0% in February from 4.1%. However, the annual growth in average hourly earnings is forecast to ease slightly to 2.8% from January's 8½-year high of 2.9%. A stronger reading could exacerbate the concerns about inflation taking off this year, which would lead to a more aggressive Fed tightening. Without a positive wage component though, a broadly strong report may not impress dollar bulls, especially against the backdrop of rising risks of a trade war.

Fed's Chair words boosted USD but Trump's view on trade sparked a sell-off

The US dollar was set to end the week on a positive note after Fed Chair Jerome Powell testified twice and other Fed speakers signalled a hawkish view on the economy. The USD had appreciated on a weekly basis up until Thursday when President Donald Trump announced a 25 percent tariff on steel and 10 percent on aluminium imports. Markets reacted to the protectionist measure with Trump unfazed by criticism and tweeting that Trade wars are good, and easy to win. The decision turned a USD on the rise against major pairs into a mixed bag. The USD is up against the AUD, CAD, GBP and NZD but depreciated against the EUR and JPY.

• 4 central banks (RBA, BOJ, BOC and ECB) expected to keep rates unchanged
• US wages could rise increasing inflation anxiety
• Employment data to be released in the US and Canada

Central Banks and US Employment Data to Guide Markets

The EUR/USD gained 0.24 percent during the week. The single currency is trading at 1.2323 after the anti-trade measures announced by the Trump administration on Thursday. The Dollar was headed for a strong month on the back of economic fundamentals and the hawkish comments from Fed Chair Jerome Powell. The market was beginning to price in another rate hike to the 3 already expected which boosted the USD across the board. The tariffs announced by President Trump reversed the gains against the EUR.

Next week will be a rollercoaster for investors with an economic calendar that features four central banks: Reserve Bank of Australia (RBA), Bank of Canada (BoC), European Central Bank (ECB) and the Bank of Japan (BOJ) as well as the release of employment data in Canada and the United States. The U.S. non farm payrolls (NFP) will be published on Friday, March 8 at 8:30 am EST with another gain of 200,000 jobs expected and a wage increase of 0.3 percent.

The ECB will deliver its rate statement on Thursday, March 8 at 7:45 am EST. President Mario Draghi will host a press conference at 8:30 am. There are no major changes expected to the interest rate or the quantitative easing program, but the central bank could take the opportunity to make minor tweaks to the language. The ECB will be cautious in its use of communication to avoid market overreaction. The central bank is expected to end its QE program at the end of the year, but it awaits a stronger inflationary pressures before signalling the move.

Canadian dollar weekly graph February 26, 2018

The USD/CAD gained 2.20 percent in the last five trading days. The currency pair is trading at 1.2907 after the Canadian currency could not deflect the one-two punch of Fed hawkish rhetoric and protectionist tariffs from the White House. Interest rates are expected to rise three to four times in 2018. Fed members have been very vocal on the subject and although it is still gradual as the moves will be for 25 basis points each, it does signal and end of low rates in the US.

The Bank of Canada (BoC) will release its rate statement on Wednesday, March 7 at 10:00 am EST. The interest rate is forecasted to remain at 1.25 percent but the central bank is still expected to hike two times this year. Growth expectations are lower after a slowdown in the final quarter of 2017 was evident with the release of the Canadian GDP on Friday. Annual GDP gained 1.7 percent, short of the 2.0 percent forecast and offering little support for the struggling loonie.

Canadian jobs data will land at the same time at US jobs on Friday, March 9 at 8:30 am. The U.S. non farm payrolls (NFP) will steal most of the spotlight as inflation anxiety has stricken stock markets around the globe. Wage growth in the United States will be key on Friday as inflation is the one factor missing that would force the Fed to raise interest rates to avoid the economy overheating.

NAFTA talks are still ongoing, but this week the steel tariffs are drawing a more dire future for the trade agreement. The seventh round will wrap up in Mexico City and so far there is very little progress. Mexico and Canada have said that they will retaliate if they fall under the steel and aluminum tariffs, but at this point as it is becoming the norm with the Trump Administration there are few details on the full scope of the tariffs.

The USD/JPY lost 1.22 percent in the last five days. The currency pair is trading at 105.55. The Japanese Yen has been one of the biggest movers against the American currency appreciating 6.25 percent versus the greenback. The Yen has reached levels it hadn't been trading at since prior to the US elections.

The Japanese currency was the big winner of the week that saw Fed rhetoric and trade war drive the market. The Bank of Japan (BOJ) will feature this week on Wednesday and Thursday when it release its rate statement and a press conference with BOJ Governor Haruhiko Kuroda. The Governor has just been reappointed for a second term and on Friday hinted about ending the massive stimulus in 2019.

Market events to watch this week:

Monday, March 5

• 4:30am GBP Services PMI
• 10:00am USD ISM Non-Manufacturing PMI
• 7:30pm AUD Current Account
• 7:30pm AUD Retail Sales m/m
• 10:30pm AUD Cash Rate
• 10:30pm AUD RBA Rate Statement

Tuesday, March 6

• 4:35pm AUD RBA Gov Lowe Speaks
• 7:30pm AUD GDP q/q

Wednesday, March 7

• 8:15am USD ADP Non-Farm Employment Change
• 8:30am CAD Trade Balance
• 10:00am CAD BOC Rate Statement
• 10:00am CAD Overnight Rate
• 10:30am USD Crude Oil Inventories
• 7:30pm AUD Trade Balance

Thursday, March 8

• 7:45am EUR Minimum Bid Rate
• 8:30am EUR ECB Press Conference
• Midnight JPY BOJ Policy Rate
• Midnight JPY Monetary Policy Statement

Friday, March 9

• JPY BOJ Press Conference
• 4:30am GBP
• Manufacturing Production m/m
• 8:30am CAD Employment Change
• 8:30am USD Average Hourly Earnings m/m
• 8:30am USD Non-Farm Employment Change

*All times EDT

In February, AUDJPY recorded its worst monthly performance since April 2016, posting a loss of 5.8%. The negative sentiment remains strong in the first days of March, with prices hitting a 10-month low of 81.59 today but momentum indicators signal that the market could be overextended in the four-hour chart.

The Relative Strength Indicator (RSI) has been trending below 30 in oversold territory during the past two days, while Stochastics have posted a bullish cross below 20, flagging that upside movements might be underway in the near-term. The trend, however, might remain to the downside as long as prices continue to trade below the 20-period simple moving average line (SMA) and the Ichimoku cloud.

Should the pair head lower, the 81.00 key-level, last seen in November 2016, could provide nearby support. A closing bar below this mark could open the door to the 80.00 and 79.00 psychological marks.

To the upside, AUDJPY could meet resistance at the red Tenkan-Sen line at 82.35 before it extends its recovery to the 20-period SMA at 82.80. If the market manages to step above this area, bulls' radar could target the previous-support handle of 83.29 and then the 50-period SMA at 83.51.

Red hot growth in the first half of the year gave way to only tepid growth in the second half in Canada in 2017, but for the year as a whole it was the biggest increase in GDP growth since 2011.

Soft Second Half

Real GDP growth in Canada came in at a 1.7 percent annualized rate in the fourth quarter. Not only was that a bit below expectations, but the initially reported growth for Q3 was revised a bit lower as well. In short, after growing faster than the rest of the G7 in the first half of the year, Canada's economy slowed more than initially reported in Q3 and grew less than expected in Q4.

When we look into the underlying details, there is evidence of some of the factors we have cited among our top worries for Canadian growth. Specifically, there were signs of fatigue in consumer spending and a softer pace of inventory investment. Consumer spending expanded at just 2.1 percent, the slowest pace of expansion all year. Inventories are still building but at a more modest pace, the result of which was a full percentage point drag on headline GDP growth.

Looking forward, we remain concerned about elevated household debt levels and the run-up in home prices that have occurred alongside the leveraging process over the past several years (middle chart). The Bank of Canada may be somewhat less inclined to raise rates quickly after this report, but the eventual normalization of interest rates could further hamstring household spending. On the inventory side, stockpiling in 2017 may result in further drags on growth in 2018 as a more normal pace of inventory building would act as a governor on the pace of broader GDP growth.

Over time, we also expect to see a retrenchment in business fixed investment, though we saw no signs of it here in the fourth quarter despite three straight periods of expansion earlier in the year. Remarkably, not only did business spending stay positive, it actually posted its fastest pace of expansion all year, growing at a 9.5 percent annualized pace. The question going forward is the extent to which this strength reflects some pent-up demand after business spending suffered during the low oil-price environment of 2015 and early 2016, or whether the pick-up is a function of a re-emergence of animal spirits and the gathering momentum of global growth.

Down Where the Trade Winds Play

It has been a rather consequential week for North American trade dynamics. Not only were the latest rounds of NAFTA negotiations underway this week in Mexico City, there was also the announcement of steel and aluminum tariffs rolled out this week by the White House. As of this writing, it is unclear whether Canada will receive an exemption on the tariffs. Our analysis finds that Canada supplies roughly 20 percent of imported steel and iron to the United States, so clearly without an exemption the new U.S. tariff would be bad for Canadian exports. For the fourth quarter anyway, Canadian exports expanded at a 3.0 percent pace, although with imports growing faster, trade was actually a drag on growth in the fourth quarter.

Week beginning 5 March 2018

• RBA on hold: AUD to weaken through 2018 and 2019.
• RBA: March policy decision, Governor Lowe speaks.
• Australia: GDP, company profits, current account, trade, retail sales, dwelling approvals.
• NZ: building work, retail card spending.
• China: CPI, foreign direct investment, trade balance.
• Euro Area: ECB policy decision, Italian General Election, SPD coalition vote results.
• US: nonfarm payrolls, Federal Reserve Beige Book.
• Central banks: BoC policy decison, BoJ policy decision.
• Key economic & financial forecasts.

Information contained in this report current as at 2 March 2018.

RBA on hold : AUD to weaken through 2018 and 2019

The Reserve Bank Board meets next week on March 6. Of course we expect there will be no change in the overnight cash rate.

We also do not expect to see any significant change in the Governor's rhetoric from last month.

The GDP Report for the December quarter - which we expect will show that annual growth has slowed from 2.8% in the year to September to 2.5% - will not print until March 7 and although the Bank will be anticipating a soft result, this is unlikely to dissuade it from its current view that GDP growth in 2018 will lift to 3.25%.

Readers should be aware that Westpac has reviewed its currency forecasts and, while continuing to see an AUD low of USD 0.70 in 2019, has pushed out the timing to September 2019 from March. Below I set out detailed reasoning behind our AUD views.

We expect to see the AUD gradually fall through 2018 and 2019 against the USD.

The AUD is likely to hold around USD 0.77 to June before falling to USD 0.74 by year's end.

In 2019 it is expected to reach USD 0.70 by September and to hold around that level to year's end.

These forecasts broadly reflect our Fair Value model after making some adjustments for our own judgements particularly around capital flows that may not be fully explained by commodity prices and interest rates.

The key drivers behind our views are: a fall in Australia's commodity export prices, and an unprecedented sharp negative widening in the AUD/USD interest rate differential as US rates rise sharply. Furthermore, we anticipate a reversal of the current trend for the USD to weaken against the other majors.

The key to commodity prices lies with China. China's Chairman Xi recently identified pollution; poverty and excessive leverage as China's key policy challenges.

Our commodity price views have been based around the expected slowdown in China's credit growth (particularly in the unregulated so-called shadow banking sector) firstly squeezing commodity speculators who currently hold substantial stocks of iron ore and secondly slowing investment particularly in major transport projects. These projects are typically associated and funded by local governments, usually outside the regulated banking sector. They place considerable reliance on funding from the shadow banking system. In addition, housing activity, which also partly relies on the shadow banking sector, looks set to remain quite flat over the next few years.

While these are clear factors which are likely to weigh on commodity prices, China's anti-pollution policies have been supporting iron ore and coking coal prices. Small high polluting mines/furnaces have been closed down with some production moving to larger more efficient operations. These larger producers have been using a higher share of quality imported iron ore, effectively holding up import prices despite lower production.

The dominant iron ore exporters - Australia and Brazil - have not been significantly lifting production to take advantage of higher prices and widening margins.

These dynamics will continue to support prices for some time yet. Nevertheless we expect that over the course of the second half of 2018 and through 2019, the downward pressures associated with a slowing economy and tighter credit conditions in China will gradually take their toll on both iron ore and coal prices.

We would also expect some downward price pressure from a lift in supply from the dominant exporters. Margins remain extremely attractive and we expect producers, particularly the Brazilians (around 30% of the majors' production) to lift production.

Overall, we are expecting a cumulative fall (in USD's) in Australia's Commodity Price Index of around 25% between June 2018 and December 2019. That includes around a 6% appreciation in the USD Index.

The USD Index has been under considerable recent pressure (down 15% from its peak in late 2016 to its low in mid-February). Recently it has lifted by around 2% partly reflecting the sharp rise in US bond rates.

While I was recently in the US visiting real money managers and officials, the common theme was that the recently enacted Tax Cuts and the $300 billion spending package were poorly timed. They coincided with the US economy at full employment and building momentum. The likely resulting inflation pressures and a rising FEDERAL FUNDS RATE were expected to significantly boost bond rates. In turn, higher bond rates are likely to reverse the recent weakness in the USD.

Readers will be aware that Westpac expects a considerable widening in the negative Australia/US interest rate differential as the FEDERAL RESERVE continues to raise rates and the RBA remains on hold.

Markets move on expectations.

They are currently pricing in a yield differential between Australia and the US overnight rates of around negative 50 basis points by end 2018 whereas Westpac expects negative 65 basis points. They are expecting a differential of around negative 30 basis points compared to Westpac's forecast of negative 112 basis points by end 2019.

Our expected differential in 2019 has no precedent raising the prospect that the downward pressure on the AUD could be under stated in our forecasts.

We anticipate that as markets adjust to Westpac's rate differential outlook there will be further downward pressure on the AUD. This effect is likely to be more pronounced in 2019 than 2018 with the gap between Westpac's view and the market narrowing significantly in 2019. Note that only a few weeks ago markets were only expecting a negative differential of 28 basis points by end 2018. They have moved significantly towards the Westpac view. But there is more to come.

Falling commodity prices; widening negative yield differentials and a stronger USD all point to a weaker AUD through the remainder of 2018 and 2019.

The week that was

Market participants and the RBA have long been waiting for an uplift in business investment. In the latest CAPEX release, there is cause for optimism (albeit measured). While the quarterly outcome which feeds into GDP disappointed, this came as a result of a latecycle bout of weakness in mining investment, as key gas projects draw near completion. More importantly for the outlook was the 1.8%, 10.4%yr gain for CAPEX across the non-mining economy. This upswing is being driven by construction work, particularly non-residential activity to meet the needs of a growing population. Victoria is the most notable beneficiary by state.

In addition, the forward estimates for 17/18 and 18/19 financial years were on the upside. See chart of the week for further detail.

A consequence of the above CAPEX disappointment in the December quarter (and last week's construction release) is that we have shaved our Q4 GDP forecast for next week by 0.1ppt to 0.5%, 2.5%yr. Of the contributors to the overall forecast, the positives include: a modest bounce for consumption 0.7%, 2.1%yr; a 1.5%, 7.0%yr gain for business investment; and a gain for public spending of 0.6%, 4.4%yr. Net exports will however subtract 0.6ppts in the quarter. Looking to 2018, the sub-trend pace of expansion is set to persist as the consumer is restrained by weak wages growth, and the home building downturn continues.

Important to both of these factors, house price growth remained in a downtrend in February. The national composite has fallen 1.3% since October, led by declines in Sydney. Here, annual price growth turned negative for the first time since late 2012, - 0.5%yr. In Melbourne, annual price growth has instead held up, 6.9%yr in February. Recent data on auction clearance rates point towards a stabilisation in prices in the months ahead. For an in-depth assessment of Australian housing markets, see our latest Housing Pulse report.

Turning to the US, new FOMC Chair Jerome Powell's first Congressional testimony was the focus for markets this week. In his first appearance, before the House of Representatives Committee, he struck a confident and committed tone, emphasising that since the December FOMC meeting, the economy had strengthened on the back of tax and spending initiatives from the government and given continued gains for employment and confidence. The market debate quickly turned to whether the next set of forecasts from the Committee would point to four rather than three rate hikes in 2018. However, a subsequent repeat performance before the Senate carried a more cautious tone on wages and inflation, and this saw market pricing revert to where it began the week - President Trump's trade announcement was also a contributor (see below). It is very clearly the case that US interest rates are on the way up. Debate over the timing and the overall scale of the increase will continue through 2018; how the market reacts to each rise holds great significance. We continue to expect three hikes this year and another two in 2019, but see the risks skewed to the upside.

A new point of tension that has come to the fore this week is trade relations. Overnight President Trump announced tariffs on steel (25%) and aluminium (10%) imports to the US in pursuit of greater production and employment in the US. Only time will tell whether this is a one-off or the first in a succession of protectionist measures. It will also be critical to assess how other countries respond, either through challenging the tariffs via the World Trade Organisation, or by responding with their own measures. Along with the fiscal uncertainty being created by the tax and spending initiatives (which could add near 15ppts to US government debt over the decade, if sustained), trade will be a key area of uncertainty for the US economy (particularly the US dollar) in 2018.

One of the countries that is likely most affected by these measures is China. Data to hand for 2018 suggests that, while authorities are having great success reducing speculation absent a substantial decline in residential construction activity, Chinese growth is still very susceptible to global growth trends. External demand provided a material windfall to China in 2017; but this will not be the case in 2018. Should additional protectionist measures be imposed by the US or others, the headwinds will grow stronger still.

Lunar new year holidays make assessing Chinese data and that of other Asian nations difficult at this time of year. However, from the official China PMI's, there is some evidence that underlying momentum in manufacturing topped out at the end of 2017, and is set to slow in 2018. Being more domestically focused, growth in services has held up. For the rest of Asia, conditions are strong. This is particularly the case for Japan which is benefitting not only from a comparatively cheap currency but also its strong, export-focused corporate sector.

Chart of the week: Business investment plans

The ABS business plans survey suggests that the upturn in business investment that emerged in 17/18 will extend into 18/19.

Estimate 5 for investment in the current financial year implies a 2.5% gain on the 2016/17 year, as non-mining investment offsets the dissipating drag from mining. The first estimate for the 2018/19 financial year suggests this uptrend will continue, with a 3.5% gain overall and an 8.0% rise for non-mining spending expected. The mix remains skewed to buildings and structures (13.5%) over equipment (2.0%). Note that early estimates for the coming financial year are highly volatile. Further, the CAPEX survey is only a partial representation of business investment. That said, to the extent that it omits key growth industries, the estimates are more likely to be skewed to the downside than upside.

Looking to next week, RBA Governor Lowe is giving a speech on the "The Changing Nature of Investment" on Wednesday Mar 7.

New Zealand: week ahead & data wrap

The start of 2018 has seen divergent conditions across the New Zealand economy. Households have hit the ground running, and spending looks like it will remain firm for some time yet. In contrast, gauges of business sector activity remain soft.

Households resilient

Looking first at the household sector, the strength in spending that we saw at the close of 2017 has carried through into early 2018. Retail spending rose by a solid 1.4% in January, including strong gains in categories such as durables and hospitality. We expect that the February figures (out next week) will show that spending is continuing to grow at a healthy pace.

Contributing to this firmness in spending have been the recent pick-up in the housing market and the resilience in net migration. Both of those factors were key drivers of demand growth in recent years. And while they are now off their earlier peaks, they remain in supportive territory. However, these are also areas where we expect conditions to change markedly over the next few years, and over time that will have a dampening impact on spending.

On the housing front, we have seen a bit of a second wind over the past few months as election related uncertainty has faded and mortgage rates have fallen. With fixed mortgage rates falling further in recent weeks, and the Reserve Bank slightly easing its LVR mortgage lending restrictions, we expect the current market buoyancy will continue for a few more months. Housing market conditions have a close relationship with household spending in New Zealand, particularly for durable items like home furnishings. And with both home sales and prices lifting in recent months, it's no surprise that housing spending has remained firm.

However, even with the recent pick-up, the housing market is looking softer than it did this time last year, especially in Auckland where sales are down 20% over the past year and prices have been flat. Going forward, we expect the current resurgence will eventually give way to an extended period of soft housing market activity. In part, this is because we expect fixed mortgage rates will creep higher later this year. On top of this, the Government will be rolling out a range of policies aimed at dampening housing market conditions over the next few years including restrictions on foreign buyers, an extension of the 'bright line' test for capital gains, and the ring-fencing of losses on investment properties. This combination of polices will result in a markedly different set of housing market conditions than New Zealand has experienced in recent years, with investor demand likely to be significantly curtailed.

One of the other big drivers of household spending in recent years has been rapid population growth on the back of record levels of net migration. Through mid-2017, it looked like the migration cycle had peaked, as arrivals levelled off and departures trended upwards. However, net migration has picked up again over the past few months as arrivals have pushed higher. This has seen annual net migration stabilising at a very high level of 70,000. The key question is whether we will see net migration resuming its downtrend over the coming months. Movements of New Zealanders in and out of the country have remained stable, and we are continuing to see a gradual increase in departures of non-New Zealanders. The big uncertainty relates to new arrivals. January's pickup in arrivals was large, and it wouldn't be surprising to see some pull back next month. In addition, we are seeing firmer conditions in other countries, which will make New Zealand look relatively less attractive. Putting this altogether, we continue to expect that net migration will decline over the next few years, however this may be quite gradual.

Business nervousness persists

Turning to the business sector, things are looking very different. Slowing GDP growth and the changing political backdrop saw business confidence fall sharply in late-2017. And while we have seen some recovery in early-2018, businesses remain deep in pessimistic territory.

Importantly, it's not just confidence about the general economic environment that has taken a knock. Activity indicators from both the PMI and PSI remain down on their pre-election levels. That includes a pullback in new orders, suggesting that we could see further softness over the months ahead.

With businesses still nervous about the economic backdrop, we've been factoring in a period of softness in investment spending over the coming year. However, due to the lags associated with capital spending, we don't expect to see this coming through until mid to late 2018. Indeed, this week's trade figures actually showed that imports of capital equipment remained firm in January.

Data Previews

Aus Q4 company profits

Mar 5, Last: - 0.2%, WBC f/c: 4.0%

Mkt f/c: 1.5%, Range: -1.5% to 6.0%

• In Q3, company profits were little changed, -0.2%, to be 1.7% higher for the year to date. Falls in mining (on lower commodity prices) and real estate (as housing cools) were offset by gains across business service sectors.
• For Q4, we anticipate a rise of 4.0%qtr, inflated by higher prices boosting the value of inventories (which is booked as a profit). However, on a national accounts basis (abstracting from this valuation adjustment) a more modest rise is likely, around +1.3%.
• Mining profits are expected to rise by almost 6% in Q4, having received a boost from higher commodity prices.
• Non-mining profits are trending higher, supported by a strengthening of domestic demand, but are mixed by industry, given an uneven expansion. For Q4, we anticipate a rise of around 3% (incorporating the artificial boost from the inventory valuation adjustment).

Aus Q4 inventories

Mar 5, Last: 0.2%, WBC f/c: 1.0% (0.3ppts)

Mkt f/c: 0.5%, Range: -0.3% to 5.6%

• Inventories were volatile in 2017, in part due to the impact of weather disruptions over the first half of the year.
• In Q3, inventory levels broadly stabilised, expanding by 0.2% ($0.3bn), to be 1.0% above the level of a year earlier. Inventories added 0.2ppts to activity in the period.
• For Q4, we expect a return to volatility, with a 1.0% ($1.6bn) rise in inventories, adding 0.3ppts to activity.
• Notably, imports of goods (ex fuel) spiked in the month of December, up 6% ($1.3bn), suggesting an abnormal clustering of shipments ahead of the new year. Some of these imported items will show-up initially as inventories
• Another consideration, mining inventories contracted sharply in Q3, -$0.7bn (in part to facilitate a lift in export shipments), a result that is unlikely to be repeated in Q4.
• As always with inventories, we note the elevated uncertainty.

Aus Jan dwelling approvals

Mar 5, Last: - 20%, WBC f/c: 1.0%

Mkt f/c: 5.0%, Range: 0.0% to 11.0%

• Dwelling approvals retraced spectacularly in Dec, dropping 20% as a an expected wind-back in Melbourne high rise approvals, after a big spike in Nov, was compounded by weakness elsewhere. Looking through recent volatility, trend approvals are again moving lower with non high rise approvals in Q4 down 3.5%yr. Assessing trends in the erratic high rise segment is much trickier but site purchases continue to point to this segment taking a further leg lower over the course of 2017-18.
• Latest housing finance data point to a slightly firmer trend in non high rise approvals in coming months. Although high rise should remain weak, this is likely to see a marginal 1% rise in total approvals in Jan. As always, housing data should be treated with extra caution around the summer holiday low period as seasonal adjustment can amplify monthly volatility.

Aus Jan retail trade

Mar 6, Last: - 0.5%, WBC f/c: 0.4%

Mkt f/c: 0.4%, Range: 0.1% to 0.6%

• Retail sales had a bumpy finish to 2017 with a solid recovery in Sep-Nov from weakness mid year giving way to a 0.5% decline in the Dec month. The iPhone X launch and increasingly popular 'Black Friday' sales were positives but may also have shifted the timing of sales. Alongside this monthly volatility, the quarterly data showed significant price declines for non-food categories associated with the launch of Amazon's Australian operations. Note that Amazon's Australian retail sales are in scope for the retail survey and should appear in sales estimates going forward.
• The wider consumer backdrop was reasonably positive at the start of 2018 with sentiment posting its best Jan read since 2010. Incomes continue to be supported by strong job gains but undermined by weak wage growth. Private sector business surveys suggest retailers saw a small lift. On balance we expect Jan retail sales to show a 0.4% gain, the inclusion of Amazon sales likely to give some boost.

Aus Q4 net exports, ppts cont'n

Mar 6, Last: 0.0, WBC f/c: -0.6

Mkt f/c: -0.6, Range: -0.9 to 0.6

• Net exports, as with inventories, were volatile in 2017, in part due to weather disruptions during the first half of the year.
• In Q3, net exports were neutral for activity, with both import and export volumes expanding by 1.9%.
• For Q4, net exports were a major headwind, subtracting an estimated 0.6ppts from activity.
• Imports rose an estimated 0.6% in Q4 to meet rising domestic demand.
• Exports stumbled, contracting by an estimated 2%, to be only 1.5% above the level of a year ago. Cereal shipments retreated from historic highs associated with the earlier bumper harvest, while coal exports fell in part due to temporary disruptions, including strike action.

Aus Q4 current account, AUDbn

Mar 6, Last: -9.1, WBC f/c: -13.0

Mkt f/c: -12.2, Range: -13.8 to -9.0

• During 2017, Australia's current account deficit has been well contained, at 2.0% of GDP in Q3, supported by elevated commodity prices boosting export earnings.
• For Q4, the current account deficit is expected to widen from $9.1bn to $13.0bn, representing 2.9% of GDP.
• Key to this, the trade position deteriorated in Q4. The trade balance swung from a surplus of $2.0bn in Q3 (revised lower from $3.1bn) to a deficit of $0.6bn in Q4. Exports stumbled at the same time as import volumes continued their upward trend (see above). As to the terms of trade, this was broadly flat in the period, we estimate.
• In Q4, the net income deficit is expected to edge higher to $12.4bn from $12.2bn. Note that the deficit has deteriorated from a 2016 average of $8.5bn/qtr as higher commodity prices translate into better returns for offshore investors.

Aus Q4 public demand

Mar 6, Last: 1.5%, WBC f/c: 0.6%

• Public demand is a key growth driver, expanding at an above trend pace in 2015, 2016 and 2017, with annual growth at 4.8%, 5.5% and 4.4% (we estimate), respectively.
• An upswing in public investment is underway, lifting from recent lows, as governments commit to additional projects - particularly transport infrastructure - now that earlier fiscal pressures at the state level have receded.
• In Q3, public demand increased by 1.5%, boosted by a sharp 7.4% jump in investment (which is often volatile quarter to quarter) but constrained by a rise of only 0.2% for public consumption (which accounts for 80% of public demand).
• For Q4, we anticipate a more modest rise in public demand of 0.6% as investment consolidates in the period.

Aus Mar RBA decision

Mar 6, Last: 1.50% WBC f/c: 1.50%

Mkt f/c: 1.50%, Range: 1.50% to 1.50%

• The RBA will almost certainly decide to hold rates unchanged at their March meeting - as they have since they last cut rates in August 2016.
• The Governor has stated that: "further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual".
• The case for patience has been reinforced by the latest price and wage updates - core inflation is only 1.6% annualised over the past half year and private wages growth is still at historic lows.
• Moreover, tighter lending standards have been helpful in containing the build-up of risk in household balance sheets.
• We continue to expect the RBA to leave the cash rate unchanged at 1.50% throughout 2018 and 2019.

Aus Q4 GDP

Mar 7, Last: 0.6%qtr, 2.8%yr; WBC f/c: 0.5%qtr, 2.5%yr

Mkt f/c: 0.5%, Range: 0.1% to 0.8%

• Real GDP expanded by a forecast 0.5% in Q4, with domestic demand up 0.7%, inventories adding 0.3ppts, with a sizeable partial offset from net exports, -0.6ppts as exports stumbled, -2%qtr. Annual real GDP growth moderates to 2.5% from 2.8%.
• Consumer spending improved, up a forecast 0.7%, after a rise of only 0.1% in Q3. Housing declined further, -1%qtr, following a strong and extended upswing.
• Business investment, +1.5%qtr, advanced having turned the corner in 2017, with a diminished drag from the mining investment wind-down and a lift in non-mining construction to meet the needs of a growing population. Public demand, +0.6%qtr, +4.4%yr, is expanding at an above trend pace, centred on an investment upswing. • See our preview bulletin for further details.

Aus Jan trade balance, AUDbn

Mar 8, Last: -1.4, WBC f/c: 0.6

Mkt f/c: 0.2, Range: -1.5 to 0.8

• In December, Australia's trade balance slumped to a deficit of $1.4bn, deteriorating from a $36mn surplus in November. Imports spiked 6.0% (+$1.9bn) in the month, suggesting an abnormal clustering of shipments ahead of the new year.
• For January, we expect a sharp reversal to a $0.6bn surplus. We highlight the uncertainty around trade forecasts, particularly in cases such as this, when the view is centred on a judgement on imports.
• The import bill is expected to decline by $1.9bn (-5.5%), fully unwinding December's spike. Contributing to the January reversal are lower prices owing to the rise in the currency, up 2% on a TWI basis and 4% higher against the US dollar.
• Export earnings are forecast to edge higher, up 0.2%, $0.1bn. A rise in iron ore exports, on higher prices and volumes, is expected to be largely offset by a moderation in coal.

NZ Q4 building work put in place

Mar 7, Last: +2.7%, Westpac f/c: +1.6%, Market f/c: 1.0%

• Construction activity picked up in September, rising by 2.7%. This was underpinned by a lift in residential construction that offset softness in non - residential activity.
• The aggregate building figures are masking stark regional differences in construction. Building activity in Canterbury is continuing its gradual post - quake wind - down. At the same time, activity is firming in other regions, including Auckland.
• The level of construction activity is elevated and there is a large pipeline of planned work. However, rising building costs, stretched capacity in the building sector, and difficulties accessing credit are all providing some brake on how quickly building activity can ramp up to meet demand. As a result, we expect a modest 1.6% rise in construction through the December quarter. The key area of risk is non - residential construction, which could surprise to the upside following its recent softness.

NZ Feb retail card spending

Mar 9, Last: +1.4%, WBC f/c: +0.6%, Market f/c: 0.3%

• Retail spending posted a solid rise of 1.4% in January, underpinned by a lift in durable spending. Stats NZ have attributed this to spending associated with increased purchases of 'back to school' supplies, which increasingly include electronic devices. However, we have also seen a second - wind in the housing market that is likely to have boosted spending on durable items. Spending on hospitality was also up.
• With mortgage rates edging down, renewed strength in the housing market, and migration remaining firm, we expect to see spending increase by 0.6% in February. Spending is expected to be up in most categories (though we are likely to see a pullback in durables spending following last month's strong gain).

US Feb employment report

Mar 9, nonfarm payrolls, last 200k, WBC 230k

Mar 9, unemployment rate, last 4.1%, WBC 4.0%

• Employment growth in the US began 2018 on a robust footing, with a further 200k jobs created. February is also likely to record a strong result, circa 230k, given both of the ISMs are pointing to strong momentum.
• Because job gains are continuing at pace as participation holds steady, the unemployment rate will edge lower to 4.0% in February. A move below 4.0% is near certain by mid year.
• Given the growing importance of wages and inflation for policy, increasingly the hourly wage series is becoming the primary focus for this release. In the short term, there is doubt over whether January's 2.9%yr outcome will be sustained in February. However, it is almost inevitable that 3.0%yr outcomes will become regular in 2018. Outcomes materially above this level however are still unlikely.

Market movers ahead

In the US , the most important release is the jobs report for February, with most focus on average hourly earnings (AHE), where another strong monthly print would be likely to add to the reflation story.

In the euro area, we await 'Super EU politics Sunday', with the Italian Parliamentary election being held and the results of the German SPD's member vote on the coalition with CDU/CSU due to be released on Sunday.

The other big event is the March ECB meeting, which is scheduled for Thursday, when we expect the ECB to change its forward guidance, removing its easing bias.

In the UK , focus remains on Brexit, as we approach the important EU summit on 22-23 March, where the ambition is to reach an agreement on transition.

In Japan , the main event next week is the Bank of Japan's monetary policy meeting ending on Friday, where we expect it to keep its 'QQE with yield curve control' policy unchanged.

Global macro and market themes

Inflation has been a key market driver this year and the balance of risks to our inflation forecasts is on the upside given the US fiscal stimulus and closing global output gaps.

Jerome Powell said the outlook for the US economy has strengthened - we still expect three Fed hikes this year but see the possibility of the Fed raising its 'dots' to three hikes for 2019 at its next meeting.

The ECB is set to remove some of its QE bias next week.

We remain positive on equities but see the US inflation outperformance as negative for the USD.

Full Report in PDF

The upcoming weekend promises to be an eventful one for European assets. On Sunday, while Italians head to the polls to elect their new leader, Germans will find out whether they have a new government, as the SPD party will announce if its members have approved another "grand coalition" with Merkel's conservatives. The party's decision could have wide-ranging effects for Germany's political stability and by extent, for the common European currency.

Germany has been entangled in political coalition talks for several months now, ever since the election in September did not produce a clear winner. Chancellor Merkel, who's party received the most votes in September but fell short of gaining a majority, has repeatedly rejected the prospect of forming a minority government, signaling that she is comfortable heading for early elections if coalition talks collapse. Her last realistic chance at forming a viable coalition is with the SPD party, her former coalition partners. Meanwhile, the SPD's leadership shied away from agreeing to a partnership directly, and instead opted to put that decision to its members via a postal vote, with the results due to be published on Sunday.

Given the speed at which the euro gained during the early weeks of 2018, one would be forgiven to forget that Europe's largest economy is facing a minor leadership crisis. To be fair, the euro's surge was mostly associated with expectations that the ECB will begin scaling back its massive stimulus program soon, not politics. Still, whether or not Germany acquires a stable and pro-EU government could hold implications for the common currency, as well as European equities. In other words, the euro managed to rally despite looming political risks, and while the ECB's actions may be the biggest driver for the currency, politics still play a significant role.

In case the SPD members finally approve the coalition offer, that would probably lift the cloud of political uncertainty currently hanging over Germany, and perhaps help the euro to resume its broader uptrend. Looking at euro/dollar, it could edge higher in this scenario and aim for a test of the 1.2350 territory, marked by the peaks of February 21, 22, and 26. If buyers manage to overcome that hurdle, the next area that may provide some resistance is 1.2390, identified by the lows of February 19.

A rejection by the SPD, on the other hand, is likely to exert downward pressure on the world's most traded currency pair, as uncertainty heightens and the probability for early elections rises dramatically. An unstable political situation in Germany would also diminish the likelihood that a Franco-German partnership pushes forward with implementing the EU reforms that French President Macron has repeatedly called for over the past year. Euro/dollar may continue to correct lower and test the 1.2205 zone again, the February 9 low. A downward violation of that hurdle could set the stage for declines towards the pair's latest lows, at 1.2150.

As for which is more likely, recent opinion polls generally point to SPD members approving the deal, but by a narrow majority. Considering that such polls carry a considerable margin of error though, and that polling has not been the most reliable predictor of major political events in recent years, it is debatable how much importance one should attach to these surveys.

Besides the German coalition outcome, price action in euro pairs is likely to be affected by how the election in Italy plays out as well. Moreover, the ECB is set to meet next week and thus, market attention may shift back to economics before too long, especially since the Bank is anticipated to tweak its policy language in a more hawkish direction at this gathering.

Markets:

Global core bonds lost marginally ground today amid an empty eco calendar. The market move is somewhat remarkable as yesterday's trading themes remained at play. US tariffs on steel and aluminum raised fears of trade wars. President Trump added fuel to the fire by stating that trade wars are a good thing and easy to win. European stock markets lose again up to 2%, but no longer support core bonds. It's an indication that general sentiment towards core bonds is structurally negative. Rising real rates, higher inflation expectations and a hawkish shift in tone by the Fed are the main drivers behind US yields' push higher. Technically, the German 10-yr yield failed to break below 0.62% support. Yields can start a new upleg if worst case scenarios are avoided in this weekend's political events (Italian elections, SPD vote on coalition agreement). The US yield curve bear steepens at the time of writing with yields 1.4 bps (2-yr) to 3.4 bps (30-yr) higher. The German yield curve bull flattens with yields up to 2.4 bps (30-yr) lower. An overnight effect is at play as US yields corrected lower yesterday evening. 10-yr yield spread changes versus Germany widen up to 2 bps with Greece (-7 bps) underperforming.

Yesterday's announcement of US president Trump on import tariffs abruptly aborted a tentative USD rebound. This theme remained the dominant factor for global FX trading today. There were hardly any eco data to guide trading. The USD decline slowed temporary this morning. Markets apparently pondered the seriousness of the consequences. However, the risk-off trade intensified again as US president Trump indicated that he wouldn't backtrack on his intentions, triggering a new USD downleg. EUR/USD jumped back above the 1.23 area. USD/JPY extended its downtrend. The pair dropped below the 105.50 area. The political event risk in Europe (Italian elections and SPD approval of German government coalition) has no negative impact on the euro for now. USD weakness prevails.

Sterling trading was driven by the potential consequences of UK PM May's Brexit speech for the negotiations between the EU and the UK. Over the previous days, it became already clear that the water between the UK and the EU remains very deep. Today's speech didn't bring much progress on the way to a solution. UK PM May put forward five tests for the Brexit negotiations. However, the implementation of those principles, e.g with respect to the Irish boarder, will meet EU objections. Sterling was in the defensive (against the euro) earlier this week and May's speech didn't change that. EUR/GBP tries to regain 0.8930 intermediate resistance. Cable gained marginally ground today, as the dollar and sterling both faced serious headwinds. The pair trades close to, but slightly below 1.38. The UK construction PMI was marginally stronger than expected, but it was no issue for sterling trading.

News Headlines:

The Norwegian government announced that it will lower the Norges Bank's inflation target from 2.5% to 2%. The Norges Bank will adopt a forward-looking and flexible approach toward inflation targeting so the policy can support the economy and counter financial imbalances, according to the statement.

President Donald Trump's planned tariffs prompted angry responses from U.S. allies around the globe Friday, driving down stock prices and generating warnings of a possible international trade war. EU trade commissioner Malmstrom said that the EU will consider imposing its own safeguard tariffs on imports of steel and aluminium.

British PM May called for a deep partnership with the European Union after Brexit, setting out ambitions for a tailor-made deal with independent arbitration and new arrangements for regulation and financial services.

The Canadian economy closed out 2017 on a ho-hum note as GDP rose 1.7% in Q4 (Q/Q, SAAR), roughly matching the previous quarter's revised pace of 1.5%. Healthy gains in export prices led to significant gain in nominal output, which rose a robust 6.5%. Over 2017 as a whole, real GDP expanded by 3.0%, while nominal growth was a brisk 5.3% - the strongest pace since 2011.

Leading growth higher was investment, which climbed 9.6% in aggregate. Investment in residential investment surged ahead, up 13.4%. New construction gained 12.7%, while ownership transfer costs surged 42.8% likely reflecting a recovery from prior quarters as well as the pull-forward of activity ahead of January's changes to mortgage underwriting rules. Non-residential investment also came in strong: non-residential structures investment rose 5.4%, while investment in machinery and equipment rose 12.7%. Government investment was up 10.3%.

Canadian consumers cooled their jets somewhat as household consumption slowed somewhat, to 2.1%. The pace of goods spending ticked down slightly, to 1.6% (Q3: 1.2%), while spending on services slowed to 2.5% from 5.7% previously.

Trade took a significant bite out of headline growth (subtracting 1.1 percentage points) as export growth (+3.0%) failed to keep up with imports (+6.3). Inventories also subtracted from growth (-0.7 percentage points) as firms added slightly less to their stocks.

It was another quarter of solid income gains, as aggregate employment compensation climbed 6.1% - its strongest gain since 2011. This was down largely to a 6% gain in wages and salaries. Household disposable income was up a solid 5.2%, leading to a slight uptick in the household savings rate, to 4.2%, from an upwardly revised rate of 4% previously.

Momentum heading into 2018 is modest. Monthly GDP was up 0.1% month-on-month in December as 13 of 20 major industries expanded. The goods-producing side of the economy pulled back slightly (-0.1%) on weakness in manufacturing (-0.7%) and construction (-0.3%). Services (+0.1%) held up, bringing its run of uninterrupted growth to 21 months as weakness in wholesale and retail trade were offset by gains in nearly all other categories.

Key Implications

Fade the headline on this one. Trade may have led fourth quarter growth to disappoint our earlier expectations, but the story today is one of a still-healthy domestic economy - final domestic demand rose a robust 3.9%, a strong performance to close what has been a strong year. Strength in investment, notably on the non-residential side was an encouraging sign, while government spending also provided a backstop to growth. One quarter is hardly a trend, but the modest slowing of consumer spending towards a more sustainable pace is to be expected in light of high household indebtedness and rising interest rates.

To be sure, headwinds are mounting. The surge in residential investment was almost certainly due to a pull-forward of activity ahead of mortgage underwriting changes. Data received so far for 2018 indicates that this sector will see a big reversal in Q1. Trade also remains a wildcard, with a plethora of near-term headwinds. On the flip side, healthy income gains, a moderately favourable investment environment (at least for domestically-focused firms), and ongoing government stimulus all suggest that growth is likely to continue, albeit at a more sustainable pace.

Turning to the Bank of Canada, the wages and salaries measure of the national accounts, which a January research note notes has the highest weight in their 'wage-common' measure - roared ahead in Q4. This is up 4.9% year-on-year and continues a now six-quarter run of acceleration, marking its fourth straight quarter of gains above 3%. External uncertainties, the impact of past rate hikes and changes to mortgage underwriting rules all suggest that the best approach for now is to 'wait and see.' Still, with Canada in the mature part of the economic cycle and inflation pressures continuing to rise, more rate hikes are likely in store.

Highlights:

• Canadian Q4 GDP growth rose an annualized 1.7% which was slightly below expectations of a 2.0% gain.
• Monthly December GDP growth rose 0.1% following a 0.4% gain in November. Our expectation is that rising interest rates will keep both monthly and quarterly GDP growth little changed going in 2018 though U.S. trade policy is presenting a growing downside risk.

Our Take:

The 1.7% (annualized) gain in Q4 GDP and the revised 1.5% gain in Q3 are down significantly from the unexpectedly strong average increase of 3.7% from mid-2016 to mid-2017. This earlier strength resulted from a cessation of sizeable declines in energy investment along with consumers continuing to respond to historically low interest rates. The resulting strong pace of activity had the impact of moving the economy to capacity by mid-2017. Thus the slowdown in growth over the second half of last year is not unwanted and will help insure the economy does not move too far into excess demand and stoke inflation pressures. In fact the intent of policy going forward will be to sustain growth close to the economy's potential rate, which is assumed to be around 1.6%. Our forecast assumes that such will be achieved by the Bank of Canada continuing to move the overnight rate gradually higher by 25 basis points per quarter through early next year. Given the hike in January and the Q4 growth coming in slightly below the Bank's projected increase of 2.5%, though, our expectation is that the central bank will remain on the sidelines at the next Wednesday's policy meeting.