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Briefing highlights

  • Not much can help economy
  • Economy contracts in November
  • Markets, loonie at a glance
  • GE beats profit estimates
  • Mastercard tops analyst estimates
  • Italy slides back into recession
  • From today’s Globe and Mail

Wither the economy

Economists are marking down their forecasts for economic growth in Canada, both past and future, some seeing little that can “save the day.”

We saw some of this play out today when Statistics Canada reported that the economy contracted marginally in November, by 0.1 per cent, setting the stage for a weak fourth-quarter reading.

That followed October’s bounce of 0.3 per cent.

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Among the November losers, the federal agency said, was the manufacturing sector, which contracted 0.5 per cent for the third downbeat reading over the course of four months.

Construction also suffered, as did finance and insurance amid stock market declines.

Retailers were also hit, as was the energy patch.

“October now looks to have been an island in the storm for the Canadian economy, as November saw a return to weakness,” said CIBC World Markets chief economist Avery Shenfeld.

“Real GDP fell 0.1 per cent, matching our forecast, but that now joins with the flat period for August-September to mark three of the last four months in which performance was lacklustre,” he added, projecting fourth-quarter growth will now come in at about 1 per cent.

And while it’s in the rear-view mirror, Bank of Montreal has now cut its forecast for fourth-quarter growth to just 1.2 per cent, setting the stage for 2019.

Looking further out, BMO also projects Canada’s economy will expand at a pace of 1.8 per cent this year.

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Bank of America Merrill Lynch has also just trimmed its 2019 projection for Canada, matching BMO at 1.8 per cent and down from its earlier forecast of 2.2 per cent.

And much uncertainty lies ahead, warned Carlos Capistran, its Canada and Mexico economist.

“The economy is facing a deceleration in external demand, a negative terms-of-trade shock (from oil prices) and uncertainty from U.S. trade policy,” Mr. Capistran said.

Part of Mr. Capistran’s new forecast is pegged to what Bank of America expects will be slower-than-expected U.S. economic growth, at 2.5 per cent, and weak oil prices.

However, “we coincide with the [Bank of Canada] that lower oil prices are likely to soften the economic outlook, but that the impact should not be nearly as large as in 2015.”

Mr. Capistran wondered in his report whether exports can “save the day.”

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That’s not likely, he declared.

“Global trade is decelerating, which will have a negative impact on Canadian exports through softer demand for U.S. exports,” Mr. Capistran said.

“Uncertainty over the U.S.-China trade war will likely also have an impact on Canada’s exports, as global trade is likely to remain soft, tariffs are likely to remain high and Canada-China business relations seem likely to remain tense.”

Nor are higher oil prices likely to save the day, though, Mr. Capistran added, they may not be “a drag.” And, of course, as The Globe and Mail’s James Keller reports, Alberta Premier Rachel Notley eased up on the supply cuts Wednesday.

Bank of America analysts expect the spread between West Texas intermediate, the U.S. oil benchmark, and Western Canada Select to hold at between US$15 and US$18, far lower than where it had been before Alberta’s ordered cut in production. (A smaller differential means Canadian oil fetches increased prices.)

“This range assumes that U.S. Gulf Coast refiners’ access to Latin American heavy oil will continue to shrink as Venezuelan production declines, which, coupled with broader OPEC cuts, will continue to lend support to WCS prices.”

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Then there are concerns over approval of the new U.S.-Mexico-Canada pact that would replace the North American free-trade agreement.

While observers such as Mr. Capistran still expect approval, they also suggest a showdown between the White House and the Democrats could hold things up, possibly delaying it into next year.

Don’t count on the Canadian consumer to bail out the economy.

The latest we’ve seen is a drop in retail sales in November, for example, and Canadians are expected to tighten their spending even further given that they’re now juggling higher interest rates, among other things.

“There’s no doubt that households have become more sensitive to credit costs due to elevated debt and a near-record debt-service burden, with payments gobbling 14.5 per cent of disposable income in Q3, up 0.4 of a percentage point from mid-2017,” said BMO senior economist Sal Guatieri, projecting that growth in consumer spending will ease 1.6 per cent this year and 1.4 per cent in 2020, compared with 2018’s estimated 2.2 per cent.

Capital Economics also forecasts slower growth in consumer spending, at about 1.5 per cent in each of the next two years, despite what it calculated as a “windfall” of $60-billion annualized.

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“The upshot is that households are likely to save, not spend, the bulk of their windfall from the drop in gasoline prices,” said Stephen Brown, its senior Canada economist.

“In fact, we expect consumer spending growth to lag incomes growth in the coming years as households’ precautionary saving rises.”

All of this, of course, makes for a cautious Bank of Canada, which recently signaled a pause in its rate-hiking cycle, though is still expected to raise its benchmark one or two more times.

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