Mixed Signals for Canada’s Economy

The third quarter GDP reports an economy with stronger growth than expected. Out partners at National Bank Financial Economics offers a thorough analysis that reveals many aspects of our economy remain robust, including: domestic demand fired on all cylinders, consumer demands remains strong, household savings rates increase and inventories continue to be drawn down. Job growth has even outpaced economic growth to this point. These indicators paint a positive picture for 2020 with modest growth projected but recent November 2019 jobs numbers propose a ‘significant fly in the ointment’.

November 2019 Canadian Job Numbers Tumble

Just when it appeared we expected to enter 2020 on a modestly positive keel, the winds of change appear in the November jobs report. The chart below offers a longer term perspective on the recent increase in unemployment. Coupled with the Bank of Canada leaving overnight rates unchanged at 1.75%, the Bank of Canada focused on the resilience of the Canadian economy in their most recent statement.

The employment report was way below consensus expectations
in November, registering its worst monthly print since the 2008-
2009 recession.

Trade Wars – ‘The Yin and The Yang’

The Canadian and American economies are proving to be resilient in light of current global trade tensions and wars.

U.S. consumer spending, which accounts for an outsized share of GDP, bounced back strongly, supported by the lowest unemployment rate in 50 years. Canada’s wage growth and inflationary pressures have emerged against a steady, central bank interest rate. Yet, Canada had similar increase in economic output in GDP. (NBF July 2019) Furthermore, some U.S. trade tensions have benefitted Canadian manufacturers and producers. For example, Lobster exports are way up to China more than doubled after receiving a 3-percentage point Chinese tariff cut. Also, the Canadian dollar has been appreciating against the U.S. dollar. (It) has increased over 3% since the end of May 2019 and maybe begin to soften to benefit Canadian exporters.  (BDC July 2019) Sounds like a pretty good economic ‘Yang’. So what’s the ‘Yin’?

Trade Wars Expand Their Impact

Trade Wars may be a negotiating strategy but if sustained they will become a global ‘wet blanket’ that no economy will escape. As our partners at NBF Economics, point out in their recent economic outlook, China’s slowdown is significant. This is the ‘Yin”. A significant Chinese economic slowdown could hit Canada hard and cause a decline in the U.S.

“In China, GDP expanded just 6.2% in Q2 from a year earlier (+1.6% q/q non-annualized). Its slowest pace since data collection began in 1992. Although in line with expectations, this result confirmed that the world’s second largest economy is slowing amid persistent U.S. trade tensions. The deceleration could have been worse had other indicators not surprised on the upside in June.”

NBF Economics July 2019
Predicted U.S. GDP is expected to decline especially if trade wars persist.
Predicted U.S. GDP is expected to decline especially if trade wars persist.

“Global trade contracted 2.3% between October and April, according to the Netherlands Bureau of Economic Analysis. The World Bank expects the global economy to grow by just 2.6% this year—the weakest pace since the financial crisis.”

Source: BDC July 2019

It appears the later half of 2019 may be more Yin than Yang. Looming challenges include slowing Chinese growth coupled with the U.K.’s new Prime Minister’s hard line approach to Brexit.

Interested In Interest Rate Trends?

Canadians, whether borrowers, lenders or savers have been attuned to rising interest rates in 2018. Rates are on the rise and where they go depends upon external forces such as exchange rates with trading partners and equity markets.

The Canadian economy had a solid month with positive employment figures, settlement of the US NAFTA 2.0 (USMC agreement) and the large liquid natural gas (LNG) project announcement. Looking forward, our partners at National Bank Financial (NBF) Economics offer investors insights on pace and and timing of interest rates which include:

  • The Bank of Canada (BoC), as widely expected, raised the overnight rate 25 bps to 1.75% on October 24, 2018
  • NBF continues to see the Bank (BoC) taking a long pause at 2.5% bank rate
  • NBF outlook for 10-year U.S. Treasuries is trading around 3.50% and 10-year Canadas around 3.10%, a year from now in October 2019
  • NBF sees the Canadian central bank overnight rate at 2.5% and the upper bound of the target fed funds range at 3.0% at year-end 2019

Enjoy a detailed outlook for Canadian, US and Global Fixed Income Markets from our partners at NBF Economics HERE.