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Economy

Oil remains a pillar of Canada’s economy

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Stephen Poloz, the Bank of Canada governor, has been telling us for a while now that he’s skeptical that statistical methods developed for the old economy are telling us everything we need to know about what’s happening here in the new economy.

When he’s in front of a crowd and the subject comes up, Poloz tends to ask everyone who buys stuff on Amazon to put up their hands. Then he informs the audience that none of those purchases are captured in Statistics Canada’s monthly tally of retail sales because that report only monitors retailers with a physical presence in Canada.

This is important because the case that the Canadian economy is in trouble is based on a set of data that is blind to much of the wealth that’s being generated in the digital realm. For example, Bank of Nova Scotia’s real-time forecast of gross domestic product, which is based on historical patterns of high-frequency data, dipped into negative territory after StatCan reported on Jan. 7 that merchandise exports declined in November.

StatCan knows it has some catching up to do, but the testing required to prove new methodology is accurate takes time. To the agency’s credit, it’s been releasing the results of research efforts that show that its high-frequency releases are missing a material chunk of the real economy. Last year, StatCan published an estimate that put the value of investment in “data, databases, and data science” at $40 billion in 2018, or 12 per cent of all non-residential investment. The value of the stock of such investment was as much as $217 billion, or about 70 per cent of the value of bitumen reserves at the end of 2017.

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Oil is still a pillar of Canada’s economy, but it’s now data that drives growth. And yet it’s oil and other tangible goods that get all the press.

So how do you track economic growth when there are no gauges attached to the primary engine? You go back to the basics and rely to a far greater degree on your instincts. For Poloz, that means putting more weight on measures that he can reliably count in real-time, and less on those that only tally the value of stuff that matters less today than it did two decades ago.

“The labour market data are telling us more than the GDP data,” Poloz said after a speech at the Federal Reserve Bank of San Francisco in November. “The labour market, that’s easy right? We can ask firms, how many people are working for you? How much are they making? Those are real. The survey part, the household part, of course it’s a survey, but even so, it has stood the test of time.”

The newest data from the “household part” of StatCan’s monitoring of the labour market were released Jan. 10. The numbers were inconsistent with an economy that’s grinding to a halt, suggesting the Bank of Canada’s leaders needn’t panic over weaker merchandise trade when they gather to reset policy later this month.

Extrapolating from the 60,000 households it contacted last month, StatCan estimates that Canada’s economy added about 35,000 positions in December, compared with an outsized drop of more than 70,000 jobs the previous month. The jobless rate was 5.6 per cent, near the lowest on records that date to the mid-1970s.

You might recall Pierre Poilievre, the Opposition finance critic, using the November hiring numbers to support his contention that we were at risk of a “made-in-Canada” recession. “In November, 71,000 Canadians went home and looked their family members in the eye and said, ‘I lost my job,’” he said at a press conference.

Given the volatile nature of the Labour Force Survey (LFS), anyone without an agenda knew that the weaker number likely signalled a slower pace of hiring, not devastation. StatCan prefers its trend measure of hiring, which increased by 1,800 positions, the fewest since November 2015. That’s kind of what you’d expect from a labour market that’s been performing at a high level for a long period of time.

Canadian employers created 320,300 jobs in 2019, the second most since 2007. The labour participation rate of Canadians aged 25 to 54 who are working or seeking employment is around 87 per cent, near the highest on record. The youth participation rate — one of Poloz’s favourite indicators — is around 65 per cent, essentially the highest in a decade. Employment growth must slow because we are running out of people to put to work.

“Canada’s strong LFS out today suggests recent job losses were merely a blip or statistical noise, not a more worrying long-term trend,” said Julia Polk, an economist at ZipRecruiter Inc., which operates a digital jobs marketplace.

Just to be clear, nothing you’ve read here is meant to make you feel great about the economy.

The latest hiring numbers caused Scotiabank’s nowcast of fourth-quarter GDP to reset to a 0.03-per-cent increase from a 0.03-per-cent decrease. Overall, the economy is weaker than most expected it would be. In October, the Bank of Canada predicted GDP would grow at an annual rate of 1.3 per cent over that period.

Canada is benefiting from having a number of different economic engines, but several of them are sputtering. Employment in Alberta was essentially unchanged from December 2018, while in Ontario, there were some 243,000 new positions, the biggest year-over-year increase for the month of December since 1987, according to StatCan.

If GDP growth continues to fall short of the central bank’s estimates, policy makers could be persuaded to respond. But predicting the path of interest rates in the years ahead won’t be as simple as running the numbers through a sophisticated model. Poloz has made clear that the Bank of Canada will be applying a lot of judgement to take into account the rapid growth of the digital economy.

“We don’t assume it,” he said in San Francisco. “We’ve got to wait to see it. Meantime, you act as if it could be happening.”

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Bank of Canada walking a ‘tightrope’ as analysts forecast inflation jump in February

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Economists expect inflation reaccelerated to 3.1% in February

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People banking on an interest rate cut may not like the direction Canadian inflation is heading if analyst expectations prove correct.

Bloomberg analysts expect inflation to reaccelerate to 3.1 per cent in February when Statistics Canada releases its latest consumer price index (CPI) data on Tuesday, following a slowdown to 2.9 per cent year over year in January.

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Article contentCPI core-trim and core-median, the measures the Bank of Canada is most focused on, are forecast to come in unchanged from the previous month at 3.3 per cent and 3.4 per cent, respectively.

Policymakers made it clear when they held interest rates on March 6 that inflation remained too widespread and persistent for them to begin cutting.

Here’s what economists are saying about tomorrow’s inflation numbers and what they mean for interest rates.

‘Can’t afford missteps’: Desjardins Financial

The Bank of Canada’s preferred measures “have become biased,” Royce Mendes, managing director and head of macro strategy, and Tiago Figueiredo, macro strategist, at Desjardins Financial, said in a note on March 18, “likely overestimating the true underlying inflation rate.”

They estimated the central bank’s preferred measures of core-trim and core-median inflation are overemphasizing items in the CPI basket of goods whose prices are rising more than five per cent. After adjusting for the “biases,” they estimate the bank’s measures are more in the neighbourhood of three per cent — which is at the top of the bank’s inflation target range of one to three per cent.

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Article content“If the Bank of Canada ignores our findings, officials risk leaving monetary policy restrictive for too long, inflicting unnecessary pain on households and businesses,” they said.

Markets have significantly scaled back their rate-cut expectations based on the central bank’s previous comments. Royce and Figueiredo are now calling for a first cut in June and three cuts of 25 basis points for the year.

“Given the tightrope Canadian central bankers are walking, they can’t afford any missteps,” they said.

‘Inflict too much damage’: National Bank

The danger exists that interest rates could end up hurting Canada’s economy more than intended, Matthieu Arseneau, Jocelyn Paquet and Daren King, economists at National Bank of Canada, said in a note.

“As the Bank of Canada’s latest communications have focused on inflation resilience rather than signs of weak growth, there is a risk that it will inflict too much damage on the economy by maintaining an overly restrictive monetary policy,” they said.

They argue there is already plenty of evidence pointing to the economy’s decline, including slowing gross domestic product per capita, which has fallen for six straight quarters. The jobs market is also on the fritz with the private sector having generated almost no new positions since June 2023, they added.

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Article content“Moreover, business survey data do not point to any improvement in this area over the next few months, with a significant proportion of companies reporting falling sales and a return to normal in the proportion of companies experiencing labour shortages,” the economists said.

Despite all these signs of weakness, inflation is stalling, they said, adding it is being overly influenced by historic population growth and the impact of housing and mortgage-interest costs.

The trio expect very tepid growth for 2024 of 0.3 per cent.

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Rising gas prices: RBC Economics

Higher energy prices likely boosted the main year-over-year inflation figure to 3.1 per cent in February, Royal Bank of Canada economists Carrie Freestone and Claire Fan said in a note.

Gasoline prices rose almost four per cent in February from the month before. But the pair believe a weakened Canadian economy and slumping consumer spending mean “price pressures in Canada are more likely to keep easing and narrowing (to fewer items in the CPI basket of goods).

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China Growth Beats Estimates, Adding Signs Economy Gained Traction With Stimulus

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China’s strong factory output and investment growth at the start of the year raised doubts over how soon policymakers will step up support still needed to boost demand and reach an ambitious growth target.

Industrial output rose 7% in January-February from the same period a year earlier, the National Bureau of Statistics said Monday, the fastest in two years and significantly exceeding estimates. Growth in fixed-asset investment accelerated to 4.2%, strongest since April. Retail sales increased 5.5%, roughly in line with projections.

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China’s retail and industrial data lifts economy, but real estate drags

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Image for article titled China’s new retail and industrial data beat expectations — but signs still point to trouble ahead

 

 

Photo: Florence Lo (Reuters)

 

 

Official economic data out of China for the January and February period came in better than expected. Industrial output rose 7%, higher than the 5% forecast by economists in a Reuters poll, and sped up from the 6.8% growth in December, according to data published Monday by the National Bureau of Statistics.

Meanwhile, retail sales grew 5.5%, better than the 5.2% predicted by analysts but slowed from the previous period’s 7.4%.

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Still, the country’s troubled real estate sector continues to weigh on the economy: Investment in property development fell 9%. Commercial real estate sales are also down double-digit percentages.

“The national economy maintained the momentum of recovery and growth and got off to a stable start,” the statistics office said in its release. Beijing typically releases combined data for January and February to smooth over distortions caused by the Lunar New Year holidays.

China’s shaky domestic demand

Clouding the strong numbers from Monday’s data release are the persistent signs of weak domestic demand in China. New bank lending in China fell more than expected in February, according to Reuters calculations based on People’s Bank of China data.

Total outstanding yuan loans grew by 9.7% last month, a record low in data going back to 2003, according to Bloomberg. The sluggish borrowing demand comes even as the Chinese central bank made a surprise cut in the amount of cash that banks must hold in reserve, suggesting the stimulus measure has had little impact. And Beijing’s exhortations for unleashing “new quality productivity” (also translated as “new quality productive forces”) remains more rhetorical than substantive, particularly absent deeper structural reforms to the country’s economy.

With shaky demand at home, China’s bid to hit a GDP growth target of 5% this year will likely mean leaning heavily on its export machine. But that gambit will also face hurdles as governments, including the EU and Brazil, launch probes into China’s allegedly unfair trade practices. Separately, the U.S. is considering whether to investigate Chinese shipbuilding following a petition from major American labor unions.

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