April 2016 Annual Reassessment of Potential Output in Canada

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This note summarizes the Bank of Canada’s 2016 annual reassessment of potential output growth, which is projected to be 1.5 per cent over 2016–18 and 1.6 per cent in 2019–20. This projection is weaker than the one presented in the April 2015 Monetary Policy Report. Substantially softer business investment, largely due to much lower energy prices, causes the growth of trend labour productivity to be weaker. Weak business investment is the main negative shock to our projection. As investment picks up and the negative effects of the ongoing economic restructuring dissipate, we expect the growth of trend labour productivity to gradually increase toward its long-term average. Demographic developments are expected to contribute to gradually weaker trend labour input growth, however, which will act as a drag on the growth of potential output. A sensitivity analysis to various assumptions suggests a range for potential output that increases from about ±0.3 percentage points in 2016 to ±0.6 percentage points in 2018 and ±0.7 in 2019 and 2020.