The Canadian economy is labouring.
Statistics Canada on Dec. 23 reported that gross domestic product dropped 0.1 per cent in October, the first decline in eight months. Last week, it observed a drop in sales at retailers, wholesalers and factories. And the agency’s latest inflation report showed that the average of the Bank of Canada’s three preferred price measures was 2.2 per cent, the highest in a decade.
Reasons for alarm? That depends on where you were sitting when this mini-parade of numbers started rolling out.
Veronica Clark, a Citibank economist in New York who keeps an eye on Canada, advised her clients after the GDP report that the “recent string of softer data does not yet raise concerns of a substantial slowdown, but it will be important to see activity data bounce back in early 2020.”
One of the main jobs of a Bay Street or Wall Street economist is predicting the trajectory of interest rates. Clark’s bet is that the Bank of Canada will leave borrowing costs unchanged next year. Rivals who think Governor Stephen Poloz and his deputies could be forced to cut interest rates have taken a dimmer view of the latest data.
“Don’t sound the ‘all clear’ for the Canadian economy just yet, as October’s GDP results, alongside the drop we saw in November employment, casts some doubt on momentum late this year,” said Avery Shenfeld, chief economist at CIBC World Markets.
Shenfeld noted that Canada’s economy is now on track to grow at an annual rate of less than one per cent in the fourth quarter, compared with the Bank of Canada’s October estimate of 1.3 per cent. “That’s not enough to put January on tap for a rate cut, but if joined by softer jobs performance, would leave a March rate cut alive,” he said.
About those November employment numbers: the outsized drop of 71,000 should be dismissed as an outlier along with the outsized gains of 107,000 and 81,000 that StatCan’s Labour Force Survey generated in April and August, respectively. StatCan’s measure of trend hiring shows employment growth is slowing, but at a high level.
“We don’t normally put a lot of weight on individual data points, especially the labour market report, which is a very volatile report,” Poloz told reporters in Toronto on Dec. 12. “You tend to see through these things and watch the trend. And the trend has been quite a positive one for the labour market.”
Last week, the Canadian unit of Automatic Data Processing Inc., a big provider of payroll services that uses its data to generate employment estimates, said Canada added almost 31,000 jobs in November, an increase from 3,000 new positions in October and 26,000 in September. There are weak spots, particularly Alberta, but the labour market overall still has momentum, if only because the technology industry continues to rapidly expand.
“We have capacity for 200 Canadians to come on board,” Will Buckley, Canada manger at Xero Ltd., a business software firm from New Zealand that opened an office in Toronto earlier this month, said in an interview. “We want to fill this building.”
Buckley said Xero, which targets smaller companies, was oblivious to signs of slower growth. That makes sense. Sometimes decisions are bigger than simple supply-and-demand calculations. The economy is going digital and companies must pay up to join the cloud or quit.
The information-and-communication technology sector represented about four per cent of the economy when StatCan started measuring its contribution to GDP in January 2007. The segment now represents around five per cent of GDP and continues to grow. Companies that are grouped under “computer assisted design and related services” generated output of $33.5 billion in October, seven per cent more than in October 2018 and 71 per cent more than in October 2007.
Traditional manufacturers, meanwhile, are struggling around the world. The trade wars are choking investment and demand, while tariffs have diminished profit margins. But it’s possible that 2019 could represent a nadir for global manufacturing. The new North American free-trade agreement is on its way to being ratified and the Donald Trump administration and China appear to have agreed to a ceasefire in their fight for commercial supremacy. China also cut tariffs on more than 800 products that Bloomberg said were worth close to US$400 billion in 2018.
It would be wrong to assume the world is back to normal, but it would also be a mistake to conclude that factory output will continue to be as weak as it was in 2019.
The reddest flags in the latest GDP report are retail and wholesale trade, which dropped 1.1 per cent and one per cent, respectively. (The drop in retail output was the biggest in three years.) Sellers of building materials and related supplies recorded less output for the fourth consecutive month, adding colour to the decision of Lowe’s Cos. Inc. in November to close 34 “underperforming” stores. Automobile sellers also posted a decline, highlighting the trend of generally weaker sales of cars and trucks around the world.
Poloz is sensitive to signs of flagging consumption. He’s assumed for years that record levels of household debt would eventually result in less spending. But that doesn’t mean he’s prepared to shrug off evidence that his assumption is coming true. The Bank of Canada in its last policy statement of 2019 said future decisions will depend in part on whether consumer spending continues to demonstrate resilience in the face of weaker overall economic growth.
StatCan’s reports on retail sales will factor into that decision, but it’s reasonable to assume the central bank will be gathering other data. During a speech at the San Francisco Federal Reserve in November, Poloz noted that Canadian purchases on Amazon are counted in the monthly trade data. “In Canada, everybody I’m talking to shops on Amazon,” the governor said. “Amazon doesn’t meet the definition of a Canadian retailer. No bricks and mortar,” he continued. “These are conventions. It takes a long time to build the methodology to get it right.”
Amazon said last month’s Black Friday sales produced the biggest shopping day in the company’s history. Ottawa-based Shopify Inc., which makes e-commerce software for smaller companies, said its merchants generated almost US$3 billion in sales that weekend, compared with about US$2 billion in 2018.
Those are fuzzy indicators and there’s no indication of how much of that activity occurred in Canada. Still, it’s reasonable to assume that an economy at full employment did its share of Black Friday shopping. Canada probably has a little more steam heading into 2020 than the most recent data suggest.
Canada to go big on budget spending as pandemic lingers, election looms
By Julie Gordon
OTTAWA (Reuters) – Canada‘s Liberal government will deliver on its promise to spend big when it presents its first budget in two years next week amid a fast-rising third wave of COVID-19 infections and ahead of an election expected in coming months.
Finance Minister Chrystia Freeland has pledged to do “whatever it takes” to support Canadians, and in November promised up to C$100 billion ($79.8 billion) in stimulus over three years to “jump-start” an economic recovery in what is likely to be a crucial year for her party.
Prime Minister Justin Trudeau’s Liberals depend on the support of at least one opposition group to pass laws, and senior party members have said an election is likely within months as it seeks a clear majority and a free hand to legislate.
Furthermore, by September, all Canadians who want to be vaccinated will be, Trudeau has said.
Freeland has said the pandemic created a “window” of opportunity for a national childcare plan, and that will be reflected in next Monday’s budget along with spending to accelerate Canada‘s shift toward a more sustainable economy.
“It will be a green and innovative recovery plan aimed at creating jobs,” said a government source who declined to comment on specific measures. The budget will aim to help those “who have suffered most” the effects of the pandemic, the source said.
Critics say the government would be better to hold off on blockbuster spending because the economy has shown it is poised to bounce back, and to prevent the country from racking up too much debt.
“Clearly a garden-variety stimulus package is the last thing we need. This is pile-on debt,” said Don Drummond, an economist at Ontario’s Queen’s University.
“The risk is that at some point interest rates are going to go up and we’re going to be in trouble,” he said, pointing to the mid-1990s when Canada‘s debt-to-GDP ratio skyrocketed, leading to rating agency downgrades and years of austerity.
The Bank of Canada cut its benchmark interest rate to 0.25% to counter the economic fallout of the COVID-19 crisis and has said rates will not rise until labor market slack is absorbed, currently forecast for into 2023. That may change when it releases new projections on April 21.
More than 3 million Canadians lost their jobs to the pandemic. As of March, before a third wave forced new lockdowns, only 296,000 remained unemployed because of COVID.
Despite still-high unemployment levels in hard-hit service sectors, the economy has expanded for nine straight months even as provinces have adjusted health restrictions to counter waves of infections.
“Once we see sustained reopening, we do think that the recovery will have quite a bit of momentum on its own,” said Josh Nye, a senior economist at RBC Economics.
“We think Canada‘s economy will be operating pretty close to full capacity by this time next year,” he said.
Economists surveyed by Reuters expect Freeland to project a deficit in the range of C$133 billion to C$175 billion for fiscal 2021/22, up from the C$121.2 billion ($96.7 billion)
deficit forecast in November. https://tmsnrt.rs/3wSJPcm
The deficit for fiscal 2020/21 ended in March is forecast by the government to top a historic C$381.6 billion ($304.5 billion).
Canada announced on Monday a C$5.9 billion ($4.7 billion) aid package for the country’s largest airline carrier, Air Canada, and said talks were ongoing with No. 2 carrier WestJet Airlines Ltd and others.
(Reporting by Julie Gordon in Ottawa; Additional reporting by Fergal Smith in Toronto; Editing by Steve Scherer and Peter Cooney)
CANADA STOCKS – TSX ends flat at 19,228.03
* The Toronto Stock Exchange’s TSX falls 0.00 percent to 19,228.03
* Leading the index were Corus Entertainment Inc <CJRb.TO>, up 7.0%, Methanex Corp, up 6.4%, and Canaccord Genuity Group Inc, higher by 5.5%.
* Lagging shares were Denison Mines Corp, down 7.0%, Trillium Therapeutics Inc, down 7.0%, and Nexgen Energy Ltd, lower by 5.7%.
* On the TSX 93 issues rose and 128 fell as a 0.7-to-1 ratio favored decliners. There were 26 new highs and no new lows, with total volume of 183.7 million shares.
* The most heavily traded shares by volume were Toronto-dominion Bank, Nutrien Ltd and Organigram Holdings Inc.
* The TSX’s energy group fell 1.61 points, or 1.4%, while the financials sector climbed 0.67 points, or 0.2%.
* West Texas Intermediate crude futures fell 0.44%, or $0.26, to $59.34 a barrel. Brent crude fell 0.24%, or $0.15, to $63.05 [O/R]
* The TSX is up 10.3% for the year.
Canadian dollar outshines G10 peers, boosted by jobs surge
By Fergal Smith
TORONTO (Reuters) – The Canadian dollar advanced against its broadly stronger U.S. counterpart on Friday as data showing the economy added far more jobs than expected in March offset lower oil prices, with the loonie also gaining for the week.
Canada added 303,100 jobs in March, triple analyst expectations, driven by the recovery across sectors hit by shutdowns in December and January to curb the new coronavirus.
“The Canadian economy keeps beating expectations,” said Michael Goshko, corporate risk manager at Western Union Business Solutions. “It seems like the economy is adapting to these closures and restrictions.”
Stronger-than-expected economic growth could pull forward the timing of the first interest rate hike by the Bank of Canada, Goshko said.
The central bank has signaled that its benchmark rate will stay at a record low of 0.25% until 2023. It is due to update its economic forecasts on April 21, when some analysts expect it to cut bond purchases.
The Canadian dollar was trading 0.3% higher at 1.2530 to the greenback, or 79.81 U.S. cents, the biggest gain among G10 currencies. For the week, it was also up 0.3%.
Still, speculators have cut their bullish bets on the Canadian dollar to the lowest since December, data from the U.S. Commodity Futures Trading Commission showed. As of April 6, net long positions had fallen to 2,690 contracts from 6,518 in the prior week.
The price of oil, one of Canada‘s major exports, was pressured by rising supplies from major producers. U.S. crude prices settled 0.5% lower at $59.32 a barrel, while the U.S. dollar gained ground against a basket of major currencies, supported by higher U.S. Treasury yields.
Canadian government bond yields also climbed and the curve steepened, with the 10-year up 4.1 basis points at 1.502%.
(Reporting by Fergal Smith; Editing by Andrea Ricci)
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