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.
As the NAFTA 2.0 trade deal (USMCA) is finalized and the trade uncertainty is resides, it still appears that successive increases in interest rates are already having an impact in key sectors such as housing and autos. Many investors are asking — where are we as it relates to the next steps of economic growth and market expectations?
Inflation is the thermometer of economic activity in Canada, which is heating up. Our partners at NBF Economics point out that inflation is rising in Canada led by food prices. These particularly impacts retirees and working families the hardest as they have rising expenses and/or fixed income lags the increases in inflation. May’s 2018 Canadian economic growth measured by Gross Domestic Product (GDP) results were better than expected, with solid headline growth and broad based gains. The dispersion of output gains, meaning the broad participation across the economy was actually the best since 2004 (See chart). The only sector seeing a decline was utilities, although a giveback was always in the cards there after colder-than-normal temperatures had boosted the prior month’s output.
Enjoy the detailed discussion and analysis from our team at NBF Economics
Trade wars and tariffs, and many other aliments don’t seem to be impacting Canada’s business owners, but? Gross Domestic Product (GDP) crept up mildly by .1% or 10 basis points with the Friday, June 29 Statistics Canada announcement. Results were modestly in-line with Canada’s economic expectations for April 2018. These results coincided with Bank of Canada (BoC) survey taken BEFORE the G7 June kerfuffle which also offered positive sentiment from private business, as outlined by Investment Executive Canada.
How have trade talks impacted business sentiment?
While we have no formal data yet, the Globe and Mail offer an opinion that Canada’s outlook would be rosy “if it wasn’t for that U.S. trade war.” Before the ‘Trump’ tariff and trade friction, a focus towards full-employment and hiring had increased substantially. As outlined by the NBF Economics chart below Canadian firms were eager to hire at the expense of investment. However, the business outlook has weakened.
“Despite an upbeat outlook, the balance of opinion on investment moved downward and that even though “almost all interviews” were conducted before the announcement of tariffs on steel and aluminum imports from Canada by the U.S. Business optimism likely took a subsequent dive, especially after the disastrous G7 meeting of June 8th/9th when Canada-U.S. trade relations took a turn for the worse.”
Trade wars and counter measures never result in positive outcomes with the exception of local sourcing. Here’s a quick review of the potential provincial impacts from CTV News. As consumers we may wish to spend your summer travels and vacation supporting local producers to the benefit of many.
Sometimes disappointing economic news on jobs can be a positive outcome for the inflation watch. Investors seemingly shrugged off the 7,000 Canadian job losses for the May 2018 employment report. This disappointing economic news instead focused headlines away from the decade-low jobless rate of 5.8% and acceleration of wage growth. Indeed, the 3.9% year-on-year increase for average hourly earnings is the highest in nine years. As the chart below indicates, the job market is tightening and with it wage growth since mid 2016 have rose.
The global economy continued to expand in the first quarter, albeit at a more moderate pace. The persistence of low inflation should limit the extent of monetary policy tightening by major central banks this year, while fiscal policy is also expected to remain stimulative in both advanced and emerging economies. As such, we expect world GDP to match last year’s growth print of 3.8%, although that assumes world governments successfully manage risks posed by trade protectionism and record debt levels.
Global Economy Highlights include:
U.S. economy firmly on track to grow about 2.8% in 2018. Solid fundamentals suggests an acceleration of growth after Q1. But protectionist policies threaten to disrupt an otherwise promising economic outlook
Persistence of low inflation should limit the extent of monetary policy tightening by major central banks this year,
We expect world GDP to match last year’s growth print of 3.8%, although that assumes world governments successfully manage risks posed by trade protectionism and record debt levels
A weaker-than-expected start to the year prompts us to downgrade our 2018 forecast for Canadian GDP growth from 2.5% to 2.2% We have also pushed to July the timing of an expected interest rate hike from the Bank of Canada
Our partners at National Bank Financial Economics has reflected on the year that was in 2017 from a global perspective as economists are want to do in order to set the stage for the balance of 2018. The economic vital signs of 2017 are robust and record setting. It’s becoming clearer why world GDP (Gross Domestic Product) growth accelerated sharply last year. Latest data from the CPB showed trade volumes not only reaching a new record but also growing in 2017 at 4.5%, the fastest pace since 2011.
What are Canada’s Economic Vital Signs for 2018?
National Bank Financial Economics offers a cautiously optimistic outlook for Canada as a result of U.S. policies and global growth. Barring the implementation of protectionist policies stateside, Canadian exporters should enjoy positive spillovers from the recently announced ramp up in U.S. fiscal stimulus. Domestic demand will also find support as business investment continues to recover, consumers enjoy higher incomes courtesy of housing wealth effects and a strong labour market,
Private sector investment spending is actually projected to rise 2% this year, the largest increase since 2014. Higher investment is planned in manufacturing, retailing, and real estate among others.
National Bank Financial Economics explores the economic vital signs for Canada in 2018.
The core inflationary outlook is closing in on the estimates the Bank of Canada (BoC) has projected. While the target rate of 2% annual inflation may sound modest, overall inflation measures are running above the Bank of Canada mid-point target on a 6-month annualized basis (CPI-Trim at 2.3% and CPI-median at 2.2%). We believe this recent trend will persist reflecting a strong economy and labour market.
Yield Curve Changes in 2018
Sustained low inflation is self-reinforcing. If businesses and individuals are confident that inflation is under long-term control, they do not react as quickly to short-term price pressures by seeking to raise prices and wages. This helps to keep inflation low. Are we in a period of sustained low inflation? It appears as bond market spreads have flattened at the long end of the curve with less than 25 basis points separating 10 years from 30 years maturities a transition is underway. This should alert investors to transitions in the economic cycle.
For a detailed analysis from our partners at National Bank Financial Economics, enjoy this review: https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/economic-news-cpi.pdf
The Bank of Canada raised its benchmark interest rate for the third time in less than a year, taking it from 1.00% to 1.25% after a string of positive economic data forced policymakers to reassess their stance. In its statement, the Bank declared that the Canadian economy was now “operating roughly at capacity”, yet the uncertainty surrounding NAFTA’s renegotiation remained a key source of concern. Read the detailed perspective from our partners at NBC Economics HERE