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Soft Canadian economy cause for concern, not alarm Add to ...

These are stories Report on Business is following Friday, Feb. 8, 2013.

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Canada pulls back
Three key reports today help paint a picture of a softer Canadian economy, but one that's more cause for concern than alarm, as BMO Nesbitt Burns puts it.

  • Canada lost 22,000 jobs in January, though the jobless rate dipped, following an exceptional showing late last year.
  • The pace of new homebuilding slowed rapidly amid a cooling housing market.
  • Canada's trade deficit narrowed, but it's still a deficit, and the dip is because imports fell more than exports.

"Combined with the steep drop in housing starts as well as the still-wide trade deficit, the jobs report rounds out a day of infamy for Canadian economic stats," said BMO's chief economist Douglas Porter.

"To some extent, the drop in jobs appears to be a payback for the surprising strength in the second half of last year, and would normally be little cause for concern," he said in a research note.

"However, with housing softening notably, and consumers and governments not in much mood (or ability) to spend, the economy will need a major helping hand from a stronger U.S. performance in the year ahead to help generate renewed job gains."

Mr. Porter added in an interview that the overall showing is not "cause for alarm, but it is cause for concern."

Canada sheds jobs
A pullback in the public sector led to the loss of 22,000 jobs in Canada last month, while the unemployment rate dipped to 7 per cent as more people stopped looking for work.

Some 27,000 jobs in the public sector disappeared in January, Statistics Canada said today, while private employers held the line and the ranks of the self employed grew slightly.

Today’s numbers come after a couple of months of particularly strong hiring, As The Globe and Mail’s Tavia Grant reports.

Compared to a year ago, private sector employment has climbed 1.9 per cent, while government jobs have held the line.

January’s losses came in the 25-54 age group, and largely among men, a pullback from the past several months.

Unemployment among Canada’s young people, the 15-24 age group, fell 0.6 of a percentage point, but still remains high at 13.5 per cent.

"It was about time that the [labour force survey] corrects to reflect the realities of stagnant economic growth," said senior economist Krishen Rangasamy of National Bank of Canada.

"We could have had an even worse number were it not for the 17,000 increase in the construction sector, which looks suspicious in a month that saw a collapse in housing starts," he added.

Housing starts slow
Housing construction slowed markedly in January, coming in below a key measure for the second month running.

Housing starts slipped last month to just 160,577 units, measured at an annual pace, compared to 197,118 in December, Canada Mortgage and Housing Corp. said today.

Urban construction starts plunged 22.3 per cent.

The drop comes amid a rapidly cooling housing market in Canada, though most observers still see a soft landing.

“The trend in total housing starts has been moderating since September 2012 and in existing home sales since May 2012,” said Mathieu Laberge, the agency’s deputy chief economist.

“Trends in the two market segments typically follow a similar pattern with the new home market lagging behind the existing home market by a few months. The current trend is also in line with CMHC’s housing market outlook, which calls for moderation in housing starts activity in 2013.”

Like building permits, these numbers can be volatile, but today’s reading was still deemed troublesome.

“While the series can be volatile during the winter months, particularly as December’s reading may have been supported by warmer-than-normal temperatures, the sheer scale of the drop points to an acute weakening in the homebuilding sector, consistent with the slowing trend in residential building permits seen in recent reports,” said economist Emanuella Enenajor of CIBC World Markets, noting that condo construction drove the decline.

“Today’s data suggest homebuilding is set to swing from an economic positive in 2012 to a drag in 2013.”

Trade deficit narrows
Canada’s trade deficit narrowed markedly in December as imports to the country fell at a far faster pace than that of exports.

The deficit was cut to $901-million from $1.7-billion in November, Statistics Canada said today, as imports declined by 2.8 per cent and exports slipped by 0.9 per cent.

Export volumes slipped 2.1 per cent, while prices rose 1.2 per cent. The overall decline was led by the energy sector.

Exports to the United States, Canada’s biggest market, slipped 4 per cent, due largely to a pullback in cars and parts.

But those to other countries gained 8.5 per cent.

Cold war warms up
As wars go, this one’s marked by several skirmishes.

The euro remains at about its lowest point in two weeks after European Central Bank chief Mario Draghi, in a roundabout way, signalled to markets that interest rates could come down depending on whether the recent strength of the common currency dampens inflation, driving the price measure below his target of 2 per cent.

“The exchange rate is not a policy target, but it is important for growth and price stability,” Mr. Draghi told a news conference after the ECB held its benchmark rate steady at 0.75 per cent, according to news reports.

“We want to see if the appreciation is sustained, and if it alters our assessment of the risks to price stability.”

That knocked down the euro, which is shared by 17 countries, and it remained flat or slightly up overnight, said senior currency strategist Camilla Sutton of Bank of Nova Scotia.

One analyst dubbed Mr. Draghi’s comments “verbal intervention” in the currency markets, and they came an intense focus on foreign exchange rates.

A lower currency helps boost a country’s exports, which are crucial in this struggling global recovery, and Japan, in particular, has been struggling with a higher yen, though policy makers helped temper that.

The yen moved up again today, however, after Japan’s finance minister and deputy prime minister, Taro Aso, said the currency had slipped “more than we intended.”

"On the grounds that a seasoned politician rarely says anything by mistake, one interpretation is that Mr. Aso is deflecting any criticism ahead of next week's G20 meeting in Moscow," said Kit Juckes, the chief of foreign exchange at Société Générale.

"Another interpretation is that he simply answered a question and triggered a correction into the weekend and ahead of the Chinese New Year, which will quieten down Asian markets."

Some of what has been playing out is indirect. The Federal Reserve, for example, has a program known as quantitative easing, an asset-buying scheme meant to bolster the recovery but one that is negative for the U.S. dollar.

China is also seen as a long-time culprit.

“The overall mood yesterday certainly wasn’t helped by Draghi’s rather downbeat comments yesterday, but in some ways he has helped because the last thing Europe needs right now is a stronger currency,” senior analyst Michael Hewson said of the overall market sentiment.

“His comment that currency values should reflect fundamentals is a sound one; however that is a tricky balancing act when talking about the euro given the widely diverging fundamentals between Germany and the rest of Europe.”

Aurizon in talks
Aurizon Mines Ltd. says it’s talking to “a number of parties” as it seeks to fend off a hostile $780-million takeover bid from Alamos Gold Inc.

Aurizon made the comment in a statement today related to its shareholder rights plan, or poison pill, adopted after the unsolicited offer from Alamos in mid-January.

“A number of parties have entered into confidentiality agreements with the company and are in the process of conducting diligence and making site visits,” said George Brack, who chairs a special Aurizon committee.

“The shareholder rights plan is important to ensure the board has adequate time to consider these and all other potential alternatives to the Alamos offer,” he added.

“The rights plan also ensures that all shareholders receive equal treatment in the event of an unsolicited offer. The board of directors did not adopt the rights plan to prevent a takeover of the company, to secure the continuance of management or the directors or to deter fair offers for Aurizon shares.”

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