Canada April 2019

4/18/2019

Interest Rates Steady
The Bank of Canada (BoC) once again left interest rates unchanged at 1.75% at its meeting in early March. The slowdown in the global economy and unexpectedly weak real GDP growth in Canada were cited as the reasons behind the latest decision to leave rates alone. Analysts still expect the BoC to raise rates by 25 basis points sometime this year unless Canadian, US and global indicators show weaker momentum than anticipated. The bank has raised the key rate five times since 2017. Canada’s economy slowed from 3% growth in 2017 to 2% in 2018 and is expected to slow even further this year.

Unemployment Steady at 5.8%
The unemployment rate remained unchanged at 5.8% in March and the number of people employed held steady after two months of increases. The economy added 116,000 new jobs in the first quarter, an increase of 6%. Employment was up 1.8% from March 2018, an increase of 332,000 jobs, with significant gains in both full-time and part-time work. March employment increased in Saskatchewan, New Brunswick and Prince Edward Island but was little changed in the remaining provinces. Employment in business, building and support services lost 14,000 jobs in March, with most of the losses in Ontario.

Consumer Confidence
Consumer Confidence in Canada increased to 55.08 in March from 54.12 in February of 2019, reversing three consecutive months of declines. Consumer Confidence in Canada averaged 53.46 from 2010 until 2019, reaching an all-time high of 57.05 in November of 2018 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 1.5%
The Consumer Price Index (CPI) rose 1.5% in February after rising 1.4% in January and 2.0% in December, according to Statistics Canada. The rise was in line with market expectations. Excluding gasoline, the CPI was up 2.1% year over year, matching January’s gain. All eight major components rose in February. On a seasonally adjusted monthly basis, the CPI rose 0.3% in February after dropping 0.1% in January.

GDP Rises 0.3% in January
Real GDP expanded 0.3% in January, fully offsetting the declines in November and December 2018. The rise was widespread as 18 of 20 industrial sectors were up. On a three-month rolling average basis, real GDP edged up 0.1%, the same rate as the three-month rolling average in December 2018. The output of goods-producing industries increased 0.6%, led by growth in manufacturing and construction. Following seven months of decline, construction expanded 1.9% in January. This was the largest monthly increase since July 2013, with all types of construction activity increasing. The residential construction subsector rose 3.1%, the second consecutive monthly gain. There was continued growth in home alterations and improvements, multi-unit housing construction and a pick-up in single and semi-detached housing construction. Services-producing industries rose 0.2% as all but one sector increased.

Canadian Recession Without US
Canadian economists think it’s possible that Canada may eventually slip into a recession without the US also experiencing one, something that hasn’t happened in 68 years. BCA Research, a global markets and economies firm that has been making projections since 1949, says that growth in the US may help push Canada into recession, and that debt-laden Canadian consumers are not well-equipped to handle higher borrowing costs. The debt to disposable income ratio in Canada has risen from 137% at the end of 2006 to 175% at the end of September 2018. US household debt to disposable income was below 100% at the end of September, the lowest it’s been since 2001, according to Bloomberg. Even at peak levels, the debt ratio in the US has never topped 140%. However, most economists and the Bank of Canada think there is only a 20% chance that Canada will go into a recession over the next 12 months.

Housing and Construction News
The national pace of housing starts slowed in February after stabilizing in January as higher mortgage rates and a slowing economy softened demand. The seasonally adjusted annual rate of starts fell to 173,153 units in February from 206,809 units in January; economists had expected an annual pace of 205,000 units in February. The annual pace of urban starts fell 18.0% in February to 155,663 units and rural starts were estimated at a seasonally adjusted annual rate of 17,490 units. The six-month moving average of the monthly seasonally adjusted annual rate of housing starts was 203,554 in February, down from 207,742 in January.

Home sales fell 4.4% in February after rising 3.6% in January, according to the Canadian Real Estate Association (CREA). The average home price was down 5.2% from February 2018. On a month-over-month basis sales were down 4.4% from January to the lowest level of sales since November 2012. It was the biggest monthly drop since the mortgage stress test went into effect in January 2018. February is typically a slow month even during a mild winter. The year-over-year drop in sales was heavily concentrated in British Columbia and Alberta. The other provinces saw sales rise 2.8%. The CREA expects annual home sales to fall 1.6% this year to 450,400 units, which would be the weakest annual sales since 2010. British Columbia and Alberta will account for much of the decline.

Retail Sales Drop in January, Rise for 2018
Retail sales decreased for the third consecutive month in January, declining 0.3% to $50.1 billion. Sales were down in 4 of 11 subsectors, representing 52% of retail trade. Lower sales at motor vehicle and parts dealers (-1.5%) contributed to the majority of the decline. Sales at building material and garden equipment and supplies dealers (+1.4%) increased for the second month in a row, following five consecutive monthly declines from July to November. After removing the effects of price changes retail sales in volume terms were essentially unchanged in January.

Retail sales rose 2.7% to $605 billion in 2018 after rising 7.1% in 2017, according to Statistics Canada. In 2018 retail sales deteriorated each quarter and rose just 0.8% in the fourth quarter. Some Canadians are struggling with higher interest rates and rising debt levels. Gasoline prices increased in mid-2018, eating into disposable income. Economists expect retail sales to grow only modestly this year.

Retail Notes
Walmart Canada saw comp store sales rise just 1.1% in the fourth quarter compared to 2.9% last year; comp store sales rose 4.5% in the US.

Canadian Tire said weak December sales were tied to unseasonably mild weather that impacted sales of snow shovels and snow blowers but noted that they had not seen customers cutting back on purchases of expensive discretionary items such as furniture or trading down to cheaper goods.

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