Briefing highlights
- Wither the Bank of Canada's outlook
- Global markets mixed
- New York poised for weaker open
- Loonie below 74.5 cents
- Ontario rent controls wrong: Economist
- Canada sinks to a trade deficit
Economy brightens but ...
Observers are wondering when the Bank of Canada is going to change its tune.
By some accounts, the central bank is looking somewhat glass-half-empty in the face of a stronger economy. By others, it’s taking a prudent, cautious stance amid many uncertainties.
By all accounts, though, Canada’s economy is picking up steam on several fronts.
We saw it last week in the January report on gross domestic product. And again Monday in the Bank of Canada’s business outlook survey. And we can expect to see it later in the morning when Statistics Canada reports what’s expected to be another monthly trade surplus.
But Bank of Canada Governor Stephen Poloz hasn’t been playing this up, still pointing to uncertain times.
“In reality, we haven’t seen a positive run like this since oil prices collapsed,” said Bank of Montreal senior economist Benjamin Reitzes.
“Monthly GDP and employment have grown at the best pace since at least 2014 over the past six months. That begs the question of what exactly the BoC is looking for? How good do the data have to get before they turn, at a minimum, more neutral?”
He was referring to the central bank’s dovish stance, highlighted again last week when Mr. Poloz said the central bank is still “very cautious,” noting the uncertainty of American trade policy, among other things, and how Canada has been tricked before by strong indicators.
“The Governor’s unwillingness to even recognize the emerging positives is concerning,” Mr. Reitzes said in a recent report, suggesting the central bank could acknowledge it and still stress no pending rise in rates.
“Confidence is a fragile thing, and Governor Poloz has done nothing to support it with an overly cautious stance,” Mr. Reitzes added.
“We’re not saying it’s time to pop the champagne, but acknowledgement of the positive trend in the data should not be too much to ask, and could even prove beneficial to growth.”
Here’s a look at some recent indicators, and a couple of key ones still to come before the central bank’s April 12 decision and monetary policy report:
As The Globe and Mail’s David Parkinson reports, Canada’s economy expanded in January by 0.6 per cent, far more than what was expected and indicating that the first quarter was a strong one, with growth at an annual pace of somewhere between 2.6 and perhaps even 4 per cent.
On Monday, the Bank of Canada’s business outlook survey showed companies are more upbeat about future sales and investing. Though, as The Globe and Mail’s Barrie McKenna writes, they’re also wary of what’s to come from the new U.S. administration.
Up until the latest reading, Canada had scored three consecutive monthly trade surpluses, though Tuesday's measure from Statistics Canada showed a drop to a $972-million deficit.
On Friday, expect to see further gains in the labour market of anywhere between 3,000 and 11,000 jobs created in March.
So with apologies to Eric Idle and the cast of Monty Python’s Life of Brian, here’s how observers feel about looking on the bright side of life vs. a glass half empty:
The bright side of life
“Our 2.3-per –cent forecast [for economic growth] for the year could prove a tick light as long as U.S. policy developments don’t turn ugly. The Bank of Canada will lean on those political uncertainties, to avoid a sharper turn towards hawkishness in its April [monetary policy report], but the timetable for a rate hike may be moving up to earlier in 2018 rather than later.” Avery Shenfeld, chief economist, CIBC World Markets
“Just to put a punctuation mark on how the outlook has shifted in the past quarter, we now see Canada outpacing the U.S. growth rate for all of 2017 ... Notably, Canadian consumer confidence is also now turning markedly higher amid the much-improved economic data. Now, if only our central bank could start seeing things that way.” Douglas Porter, chief economist, BMO
“It’s unclear why the Bank of Canada would want to maintain its dovish tone and emphasize the few negatives (e.g. inflation and business investment) amidst an abundance of positive data, unless of course the central bank is trying to restrain the Canadian dollar.” Krishen Rangasamy, senior economist, National Bank
“Bank of Canada Governor Poloz remained adamant last week that, notwithstanding a run of good economic data, the economy continues to run well below its long-run production capacity. [Monday’s business outlook survey] report will not necessarily change the bank’s view ahead of next week’s policy decision; however, the longer the run of stronger economic data persists, the harder that position will be to defend.” Nathan Janzen, senior economist, Royal Bank of Canada
Glass half empty
“For now, Governor Poloz can be patient. We think he will remain focused on trade policy risks both direct and indirect via China, a downward trend in core inflation measures, the lack of evidence in favour of rotating toward investment– and export-led growth versus reliance on the household sector among other issues and therefore downplay backward looking growth readings like [the GDP report].” Derek Holt, head of capital markets economics, Bank of Nova Scotia
“Over all, the Bank of Canada neutral stance on the interest rate outlook is reasonable right now. The incoming data is encouraging, but with business investment weak and exports still hit-and-miss, we don’t think that the economy has turned the corner.” David Madani, senior Canada economist, Capital Economics
“Taking the Bank of Canada’s estimates of potential GDP and combining them with TD Economics’ latest growth forecasts shows that the Canadian economy is unlikely to eat up its remaining economic slack this year. More likely is that the output gap closes some time in 2018. The bottom line is that, despite a brighter near-term outlook, fundamental inflationary pressures are very soft at present, and so the continued dovish tone from the Bank of Canada should not be taken as a surprise.” Brian DePratto, senior economist, Toronto-Dominion Bank
“Perhaps more importantly, the BoC’s three new core inflation measures have shown no sign of movement ... not suggestive of an economy close to full capacity. All told, there is certainly enough there for the BoC to resist pressure to respond to higher growth with an earlier output gap closure.” Simon Deeley, fixed income strategist, RBC Dominion Securities
Markets mixed
Global markets are mixed so far, with New York poised for a weaker open.
Tokyo’s Nikkei lost 0.9 per cent, while Hong Kong’s Hang Seng and the Shanghai composite were closed.
In Europe, London's FTSE 100 was up 0.3 per cent by about 7:45 a.m. ET, while the Paris CAC 40 and Germany's DAX were down by between 0.1 and 0.2 per cent.
New York futures were down, and the Canadian dollar was down to below 74.5 cents U.S.
“There’s an abundance of angst this morning, stemming from weak U.S. car data, the explosion in the St. Petersburg subway, the Prospect of Donald Trump meeting Xi Jinping at the end of the week and the rapidly approaching French election,” said Kit Juckes of Société Générale.
“The mood overwhelms considerations such as an unchanged [Reserve Bank of Australia], and has taken bond yields, equity and commodity prices lower to kick off Q2,” he added.
“The only cure is a steadying hand from U.S. data that will put a floor under bond yields, and given how low that floor is, send money off in search of yield again.”
How markets ended Monday
Ontario rent controls wrong: Economist
New rent-control rules are “the exact opposite” of what is needed to deal with housing affordability problems in Toronto, Canadian Imperial Bank of Commerce economist Benjamin Tal says.
In a new report, Mr. Tal urges the Ontario government not to proceed with “alarming” plans to expand rent-control protections, saying the Greater Toronto Area needs a significant increase in rental units to help deal with the city’s housing crisis, especially among young families, The Globe and Mail’s Janet McFarland reports.
Canadian trade disappoints
Canada has swung from a trade surplus to a notable deficit, spoiling Mr. Poloz’s hopes for a sustained turnaround.
After three months on the plus side, the country fell into a deficit of $972-million in February, Statistics Canada’s latest reading shows.
Exports slipped 2.4 per cent, while imports gained 0.6 per cent.
The tumble in exports was widespread, showing up in eight of 11 industries measured, the agency said.
Exports to the United States slipped 1.2 per cent but imports from the south fell by a larger 1.6 per cent, widening Canada’s surplus with the U.S. to $4.5-billion.
Exports to other countries sank 5.9 per cent, and imports rose 4.9 per cent.
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