Canada February 2018

GDP Grows 0.4%
The Canadian economy grew 0.4% in November after stalling out in October, and was up 3.5% from November 2016, according to Statistics Canada. Results matched economists’ expectations. The factory sector was the driving force behind the gain, with manufacturing increasing 1.8% month-over-month, the largest rise since February 2014. The production of durable goods jumped 2.5%, the biggest gain in nearly six years, on big gains in auto manufacturing and plants returning to production that had been shut down in September and October. Overall, the goods-producing side of the economy climbed 0.8% after falling 0.5% in October. Canada’s services-producing industries, which account for roughly two-thirds of total output, climbed 0.35 in November on strength from real estate and wholesale and retail trade.
 
2018 Economic Forecast
The Globe and Mail reports that 2017 turned out better than expected, as European elections did not produce extreme governments and gridlock characterized much of US policy, which limited the impact of President Trump’s agenda. The world economy strengthened and the US economy is now in its ninth consecutive year of growth, one of the longest expansions on record. Rebalancing US monetary policy could still produce economic risks to Canada. Inflation is less of a concern in Europe. Economic growth in continental Europe is expected to slow to about 2% this year from 2.3% in 2017. While Brexit did not have a big negative effect on the British economy in 2017, it is likely that the negative fallout will appear this year as Britain and the European Union go through difficult negotiations. Canada’s economy grew 3% in 2017, the largest gain among the Group of Seven economies. It is believed the pace of Canadian economic growth will slow to about 2% this year. With low unemployment, wage pressures are expected to rise, with minimum-wage increases in several provinces adding to the wage and price pressures. Canada needs to keep NAFTA negotiations on track as the collapse of this agreement has outsized risks for the Canadian economy. The Globe and Mail noted that Canada must be more competitive on the world stage and that nearly half of Canadian businesses cite government policy as a barrier to investment.
 
Canada Files WTO Complaint
Canada has filed a complaint with the World Trade Organization (WTO), accusing the US of breaking international trade rules. The complaint targets US practices tied to tariffs imposed for alleged subsidies and below-cost product sales. The action comes amid disputes between the two countries over issues such as dairy, aircraft sales and lumber.
 
Bank of Canada Raises Rates
The Bank of Canada (BOC) raised interest rates to 1.25% in mid-January, the central bank’s third rate increase since last summer. The bank noted that while more rate increases are likely over time, the unknowns surrounding the future of NAFTA and the potential negatives for Canada were shadowing its outlook. In response to the increase, Royal Bank of Canada (RBC) was first among Canada's banks to raise its prime lending rate by a quarter of a percentage point, to 3.45%. The BOC also warned that lower corporate taxes in the US would encourage firms to redirect some of their business investments. They also predicted that Canada will see a small benefit from the US tax changes due to increased demand.
 
Unemployment Rises to 5.9%
Unemployment rose in January and the economy shed 88,000 jobs after two months of increases, according to Canada’s Labor Force Survey. The decline took economists by surprise, and was the biggest drop in jobs since January 2009, when the economy shed more than 125,000 jobs. On a year-over-year basis, employment grew by 289,000 or 1.6%. The Canadian construction sector lost 15,000 jobs in January. The latest jobs numbers will most likely cause the Bank of Canada to take a more cautious approach to raising interest rates.
 
Consumer Confidence Slips
Consumer confidence slipped in January after increasing to 62.7 in December, according to The Conference Board of Canada’s Index of Consumer Confidence. The Index rose steadily through 2017, but Canadians are less confident starting 2018. While the positive sentiment about their current and future finances improved, Canadians became more pessimistic about the outlook for the labour market and are questioning whether now is a good time to make a major purchase. Every region saw a decline in the index this month except for Atlantic Canada. The monthly Index of Consumer Confidence is constructed from responses to four attitudinal questions posed to a random sample of Canadian households.
 
Existing home sales in Canada rose 4.5% in December from November, the fifth consecutive monthly increase in sales. Sales were up 4.1% from December 2016 and home prices were up 9.1% over the same period. The number of new listings rose 3.3% in December and inventory fell to a 4.5-months supply. Analysts say some of the increases over the past several months were due to people trying to avoid mortgage rule changes that took effect in January.
 
Royal Bank of Canada (RBC) increased their five-year fixed mortgage rate in mid-January to 5.14%, the first time rates have been over 5% in four years. Qualifying for a mortgage at that rate would cut a borrower’s maximum mortgage amount by 1.4%.
 
Retail Sales Rise 0.2%
Retail sales increased for the third consecutive month in November, rising 0.2% to $50.1 billion. Sales were up in 6 of 11 subsectors, representing 37% of total retail trade. Higher sales at gasoline stations, electronics and appliance stores and general merchandise stores offset lower receipts at new car dealers. Excluding motor vehicle and parts dealers, retail sales rose 1.6%. After removing the effects of price changes, retail sales in volume terms increased 0.3%. Sales were up in five provinces, led by Quebec, where sales rose 0.9%. Sales declined in Newfoundland, Labrador and Vancouver, and were unchanged in British Columbia. On an unadjusted basis, retail e-commerce sales were $1.8 billion in November, accounting for 3.5% of total retail trade, the highest proportion of total retail sales in 2017. On a year-over-year basis, retail e-commerce increased 25.5%, while total unadjusted retail sales rose 7.4%. In Canada, retail sales account for about half of all consumer spending, and are considered a proxy for overall consumer spending.
 
Canada Retail Notes
Lowe’s Canada announced that 17 Marcil stores located in Quebec will be converted to the Rona banner at the end of February. According to Lowe’s, the objective is to make Rona the top banner in the building centre market, which includes small to medium stores in the country known as “proximity stores.” Rona and Mercil operate in the same market segment, have complementary locations and both serve a large client base of contractors and pros. Consumers who shop at Marcil will see the products available to them double, going from approximately 20,000 items to more than 40,000 products in store and on the rona.ca site, according to Lowe’s Canada.
 
Walmart Canada launched two distribution hubs for ecommerce orders and fresh food distribution. The new storefronts could eventually be used as physical stores, according to a Walmart Canada spokesperson. It will be Walmart’s first push into densely populated urban settings in Canada. As in the US, Walmart Canada does not charge for pick-up orders. Walmart has teamed up with real estate partner SmartCentres, which runs Penguin Pick-Up locations across Canada.
 
Canadian businesses are slower to adopt new technology than their European and American counterparts, according to Canada’s head of Amazon Web Services (AWS), Eric Gales. He went on to explain that in the past Canadian companies were slow to adopt new technology because doing so was expensive and time consuming. But today technology is getting much cheaper and easier to implement. Last year a study funded by Intel and Dell and fielded by research firm PSB showed that 35% of Canadians think that the technology they have at home is more advanced than the technology at their office.

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