GDP Falls 0.1%
The Canadian economy shrank 0.1% in August to 1.74 trillion Canadian dollars, according to Statistics Canada. It was the first monthly decline in GDP since October of last year. GDP was up 3.5% year over year. Market expectations were for GDP growth of 0.1%, according to economists at Royal Bank of Canada. GDP fell due to a slump in manufacturing and lower energy production. The surprise drop underscores the belief that the economy slowed markedly after a remarkable performance in the first half of the year, and could keep the Bank of Canada on hold with rate policy for the immediate future.
Bank of Canada Holds Rates at 1%
The Bank of Canada held its target interest rate steady at 1% at the end of October after surprising markets by raising rates to 1% in early September. Analysts said that the pause in rate increases came amid uncertainty over North American Free Trade Agreement (NAFTA) negotiations and the potential impact of increases on home owners who are “buried” in debt. The bank noted they are still optimistic about Canada’s economy but growth is slowing from the strong pace set earlier this year. Many observers are now ruling out another rate hike from the central bank this year, rather than predicting another increase in December, and say it may be March or April before the bank raises rates again. The Canadian dollar has been drifting down against the U.S. dollar, and has lost ground since peaking in early September.
Unemployment Rises to 6.3%
The unemployment rate rose 0.1% to 6.3% in October and the Canadian economy added 35,000 new jobs. Total employment rose by 308,000 year over year, with the number of people working full time increasing by 2.7%. The unemployment rate has fallen 0.7% in the 12 months through October. The largest employment increase was in Quebec, followed by Alberta, Manitoba, Newfoundland and Labrador and New Brunswick. Employment in Saskatchewan declined. Employment rose in several industries, including construction. Employment declined in wholesale and retail trade.
Consumer Confidence Drops
The Conference Board of Canada’s Index of Consumer Confidence dropped 9.2 points to 112.4 in September after increasing for two consecutive months. The decline was widespread, with confidence in all regions slipping. However, national confidence remains significantly above the level at the beginning of the year. 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
The year-over-year increase in Canada's overall Consumer Price Index (CPI) rose to 1.6% in September from 1.4% in August. Much of the increase in headline inflation reflected higher energy prices as hurricane-related refinery shutdowns in the US put upward pressure on gasoline prices. Rising food prices were also a factor with that component continuing to rebound from multi-decade lows earlier this year. Year-over-year core inflation, which excludes volatile food and energy prices, fell to 1.2%, its lowest level since 2014, as clothing and footwear price deflation intensified.
NAFTA Talks Bog Down
North American Free Trade Agreement (NAFTA) talks have bogged down, and will be extended in 2018, according to sources from the U.S., Canada and Mexico. While no one talked about walking away, sharp differences have surfaced and negotiators agreed to what amounts to a “time out” to regroup. Top trade officials from the three nations were openly critical of each other’s positions. Some issues include proposals from the U.S. that weaken Canada’s and Mexico’s access to U.S. government procurement contracts and to eliminate a NAFTA chapter that has allowed Mexico and Canada to contest U.S. anti-dumping and government-subsidy tariff decisions by turning to a special panel of judges. The U.S. also is seeking to weaken the right of foreign investors to sue governments where they are operating. Mexico and Canada view the proposals as protectionist. The U.S. says the current terms of NAFTA are unfavorable and says the proposed terms will reduce the U.S. trade deficit and create jobs at home.
Housing and Construction News
Housing starts slipped in September to a still-strong 217,000 annualized units after rising to 226,000 in August. The year-to-date average of 217,000 units is well above the 198,000 average for last year. The decline was primarily due to a fall in multifamily starts even though that component still posted its strongest quarterly pace on record in Q3. Single-family starts rose to a six month high in September. On a regional basis, Ontario accounted for almost all of the monthly decline with starts pulling back following three consecutive monthly gains. In a separate report, building permits fell to 214,000 annualized units in August from 235,000 in July. Five-year fixed rate mortgages averaged 3.51% at the end of October.
Retail Sales Fall 0.3%
Retail sales unexpectedly dropped 0.3% in August after rising 0.4% in July. The drop in sales was widespread, led by a big 2.5% plunge in grocery sales. StatsCanada commented on the weakness shown in housing-related sales components, as building materials sales fell 1.9% and furniture store sales were down 2.4%. Eliminating the impact of overall price changes the volume of retail sales dropped 0.7% after dropping 0.1% in July, which analysts termed disappointing. Retail sales rose an average of 0.5% per month throughout the second quarter. In Canada, retail sales account for about half of all consumer spending, and are considered a proxy for overall consumer spending.
Canada Retail Notes
Grainger’s Canadian business posted a $15 million operating loss in the third quarter, up 1% from Q3 last year. Sales in Grainger’s Canadian segment rose 5% and were up 7% on a daily basis compared to the third quarter of 2016. Daily sales for the Canada segment increased 2% in local currency, due to volume. W.W. Grainger is restructuring their Canadian business and reducing branches and headcount.
Rona and Lowe’s Canadian stores will begin selling Craftsman products sometime next year. Stanley Black & Decker declined to comment on details, saying the information was being released because Lowe’s might report information that could have financial impact.
Prime Minister Justin Trudeau sent a personal two-page letter to Amazon CEO Jeff Bezos making the case for Amazon to open their second headquarters somewhere in Canada. Trudeau marketed Canada’s cities as “progressive and confident,” cited Canada’s multiculturalism and diversity and promised Amazon a highly skilled and motivated workforce. Trudeau also noted that Canada’s universal health care system and robust public pension plan reduces costs for employers. Some Canadian cities are said to be submitting proposals but declining to offer publicly funded incentives for Amazon to choose them. Amazon’s second headquarters in North America is projected to cost $5 billion (US) and employ as many as 50,000 people. Canadian cities submitting proposals included Toronto, Ottawa, Vancouver, Edmonton and Calgary. Analysts say that Canada’s chances may depend in some part on how Amazon CEO Jeff Bezos feels about angering President Trump and dealing a blow to his push for more American jobs. Amazon’s business in Canada is growing about 50% a year.
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