Canada April 2018

GDP Falls 0.1%
The Canadian economy shrank in January, with GDP falling 0.1%, according to Statistics Canada. Results were below economists’ expectations of 0.1% growth. It was the largest decline since May 2016. The drop was driven by a 3.6% decline in oil and gas extraction as well as falling real estate activity as new mortgage qualification rules kicked in. Construction spending rose 0.5% as builders continued to ramp up home construction; wholesale and retail trade also rose in January. A sharp drop off in Canadian economic growth is expected this year as households with high debt levels trim spending. The federal budget for 2018 projects 2.2% growth this year and 1.6% growth in 2019. Economists say there are a host of downside risks to the Canadian economy from abroad, particularly US trade and tax policy.
 
Canadian Economy Expected to Slow
RBC Economics projects that the Canadian economy will slow in 2018 amid the prospects of rising interest rates and lower consumer spending. GDP growth is expected to slow from 3.0% in 2017 to 1.9% this year and 1.6% in 2019. The Royal Bank of Canada (RBC) forecasts improving demand-supply conditions this year for the housing market, with more balanced house prices. The projected price increases will drop from 11.1% last year to 2.2% this year. As a result, housing sales are expected to soften this year. The Canadian dollar appreciated throughout 2017, but will be pressured this year by economic uncertainty. RBC expects the CAD to hover at 78 US cents early this year before strengthening to 82 cents by the end of the year. Canada’s oil-producing provinces will face significant budgetary shortfalls, while Ontario is expected to grow 2.0% this year before settling into the national average of 1.6% growth in 2019. Saskatchewan is forecast to lead all provinces, with 2.9% growth in 2018 and 2.5% in 2019.
 
Unemployment Remains at 5.8%
Canada's unemployment rate remained at 5.8% in March and the Canadian economy added 32,000 new jobs after adding 15,000 jobs in February. Total employment is up by 296,000 since March 2017. Employment was up in Quebec and Saskatchewan, but there was little change in other provinces. Construction added jobs 18,000 in March and the industry has added 54,000 jobs since March 2017. In the first quarter of 2018, employment dropped by 40,000 jobs due to the decrease in January. Over the longer term, employment has been on an upward trend since the second half of 2016. Most of the job gains were full-time jobs.
 
Consumer Confidence Rises to 55.72
Consumer Confidence in Canada increased to 55.72 in February from 55.12 in January, according to The Conference Board of Canada’s Index of Consumer Confidence. Consumer confidence in Canada averaged 53.27 from 2010 until 2018, reaching an all-time high of 56.40 in August of 2014 and a record low of 46.80 in February of 2016. The monthly Index of Consumer Confidence is constructed from responses to four attitudinal questions posed to a random sample of Canadian households.
 
Consumer Prices Rise 2.2% 
The consumer price index (CPI) rose 2.2% in February on a year-over-year basis after rising 1.7% in January, according to Statistics Canada. All eight categories rose on a year-over-year basis, with six of the eight growing at a faster rate in February than in January. Energy products were once again the main driver of inflation, but core inflation rose by 1.8% year over year, which was the highest level since the summer of 2016. Inflation has now risen over the Bank of Canada’s (BoC) target of 2% but the consumer sector is lagging. Analysts expect the BoC to tolerate above-target inflation for a period of time rather than risk economic growth stalling by raising rates quickly. One more rate increase is expected this year, but not until July at the earliest.
 
Canada U.S. Trade Updates
Members of the Trump administration have recently hinted that withdrawing from NAFTA is not in their current plans. A congressional gathering heard Treasury Secretary Steven Mnuchin express some optimism about getting a deal based on ongoing meetings. Mnuchin said "It is a major priority of ours to renegotiate the deal." Canadian minister Justin Trudeau also struck a cooperative tone during an address he made in mid-February in California, saying that both the US and Canada benefit greatly from NAFTA.
 
Housing and Construction News
Canadian housing starts dropped slightly in January to a still-strong 216,210 seasonally adjusted annual units, according to Canada Mortgage and Housing Corp (CMHC). Economists had expected starts to drop to 210,000 units. Last year was a strong year for housing, but the pace of growth is expected to slow this year. Nevertheless, the six-month trend in starts in January remained near the 10-year high set in December. BMO Capital Markets is still expecting a solid 200,000-plus level of starts this year. Economists are also unsure of how tighter mortgages rules that took effect this year and the three interest rate increases that have been enacted since last July are going to affect consumers. Multiple urban starts, which are generally apartment buildings, townhouses and condominiums, essentially held steady at 134,685 units in January while single-detached urban starts increased by 0.6% to 63,715 units. Rural starts were estimated at a seasonally adjusted annual rate of 17,810 units. There were some significant movements on a regional basis, with the largest gains concentrated in Ontario, where multifamily starts are soaring. Saskatchewan and Alberta also experienced good gains, due to high levels of building activity in Regina and recoveries in Edmonton and Calgary. Separate data from Statistics Canada showed new home prices were unchanged in December.
 
The number of home sales declined 6.5% in February and sales volume dropped 16.9%. Average home price fell 5%. The number of homes sold nationally hit a record high in December as people tried to get ahead of new mortgage qualification rules that went into effect in January. The Royal Bank of Canada (RBC) also raised interest rates to 1.25% in January, further dampening demand. The stricter residential mortgage lending regulations require that borrowers must be able to afford interest rates that are two percentage points above the contracted rate of the RBC’s five-year benchmark rate, whichever is higher.
 
Retail Sales Rise 0.3% 
Retail sales bounced back, rising 0.3% in January after falling 0.8% in December 2017, according to Statistics Canada. Sales were up 0.9% from January 2017. Sales at general merchandise stores rose 2.3% after falling 5.3% in December. Sales for furniture and home furnishings rose 3.4%. Retail sales increased in six Canadian provinces in January, with Ontario posting the largest gain in dollar terms at 1.2%. Total retail trade in current dollars rose to $49.9 billion after falling to $49.6 billion in December 2017. In Canada, retail sales account for about half of all consumer spending, and are considered a proxy for overall consumer spending.
 
Canada Retail Notes
Walmart Canada is launching fresh grocery delivery from online orders in Vancouver. Walmart began delivering groceries to the Toronto area last year. The Vancouver deliveries will be made through Food-X Urban Delivery. In Toronto Walmart uses crowd sourced delivery companies.
 

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