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Attention shoppers Are Canadian consumers, so crucial to the economy, tapped out?
Economists Derek Holt and Gorica Djeric of Scotia Capital believe they're "exhausted," having bucked the global trend through the recession and after.
"The consumer is tapped out," they said in a report today. "There is no pent-up demand in this country. Real consumer spending indexed to the start of 2007 for Canada compared to other major economies shows Canada as being unique in moving on to record highs through the crisis and following, while every other major economy was flat to down."
Their comments followed yesterday's report from Statistics Canada, which showed retail sales fell in January for the second month in a row, by 0.3 per cent, pulled down largely by a decline in new car sales. In volume terms, sales were down 0.6 per cent.
Statistics Canada noted that sales fell in the four biggest provinces, which represent 85 per cent of the total. The biggest drop, of 1 per cent, was in Quebec, where the sales tax climbed by a percentage point in the same month.
Mr. Holt and Ms. Djeric don't believe the tax hike sparked the full drop in Quebec, whose sales would have been weak regardless.
"Add to this the evidence that sales fell in so many categories on nation-wide terms, thus reflecting broad-based weakness."
What's that mean for the overall economy?
"[The]retail sales report threw the first bucket of water on what otherwise appeared to be a blistering hot start to the New Year," CIBC World Markets economist Emanuella Enenajor said yesterday.
"The 0.6-per-cent drop in real retail sales volumes exerts a modest drag on January's GDP, especially with the weakest category, autos, having a lower value-added (markup) to GDP than other sectors. We still expect January's growth to come in above the 0.5-per-cent pace registered in the prior month."
National Bank Financial economist Mattieu Arseneau still believes spending growth of 1.5 per cent to 2 per cent is "achievable" in the first quarter, projecting spending on services will climb, offsetting the weakness from the goods side.
Some observers have predicted for some time that retail spending would fall as consumers grapple with high debt, worried about what happens when interest rates rise later this year and in the face of warnings from policy makers, such as Bank of Canada Governor Mark Carney, that they had best get their fiscal houses in order.
"The last two months of slowing momentum in retail spending confirms our view that given high household debt and a low savings rate, the Canadian consumer can no longer be the main engine for economic growth it once was," said economist Diana Petramala of Toronto-Dominion Bank.
"Rather, Canadian economic growth is likely to be driven through a revival in exports and business investment."
How to market a budget Markets care largely about deficit-reduction in this post-recession era of fat government debts. Yesterday's budget was all about that, but like any good marketer, Finance Minister Jim Flaherty went with a title that sells: "A low-tax plan for jobs and growth."
Keep in mind that heading into the budget, the Tories were in the enviable position of being able to boast a solid economy and strong fiscal plan relative to other governments in the industrialized world. So how do they stack up on jobs and growth?
Economists say the economic projections in the budget, which are based on private sector forecasts, are solid, though they appear a shade more optimistic on jobs and a bit less optimistic on economic growth for this year. Of course, we're talking basis points here so there's nothing that's wildly off.
The budget forecasts economic growth of 2.9 per cent this year and 2.8 per cent in 2012. Toronto-Dominion Bank, for example, projects growth of 3 per cent this year, and 2.5 per cent next year. Bank of Nova Scotia, in turn, sees gross domestic product expanding by 3.1 per cent this year and 2.6 per cent next.
On jobs, the budget projects an unemployment rate of 7.5 per cent this year and 7.2 per cent in 2012. TD pegs it at 7.7 per cent this year and 7.4 per cent next, while Scotiabank is calling for 7.6 per cent and 7.4 per cent. There was a sprinkle of labour market measures in the budget, but the unemployment rate now stands at 7.8 per cent, so the government has a long way to go to bring it down to a respectable level, despite being able to boast that Canada has reclaimed all the jobs it lost to the recession.
In early 2008, before the global economy's stunning collapse, unemployment was below 6 per cent.
"This year's budget marks a transition from stimulus to restraint," said Mary Webb and Nathan Joshua of Scotiabank. "It is a difficult transition, as indicated by the continuation of several measures to ensure continued positive economic momentum and job creation. Yet with many advanced economies facing an unprecedented build-up in debt, the Canadian federal government remains in an advantageous position."
What an election could mean If Canada in fact heads into an election, economists believe there could be some headwinds for the Canadian dollar , which didn't react much yesterday after NDP leader Jack Layton said he wouldn't support the budget, and uncertainty surrounding the fiscal outlook. Most likely is that a campaign would stop any talk of the Bank of Canada hiking its benchmark overnight rate in April.
"First, the uncertainty over the near-term fiscal policy environment just went up in that it is less clear whether fiscal policy will act as a drag on growth if election goodies are dangled about," said Mr. Holt and Ms. Djeric of Scotia Capital.
"Second, over roughly the past 20 years, the [Bank of Canada]has generally avoided starting a tightening campaign in an election ... If a May or June vote is in the cards, that adds to a long list of reasons why most analysts have abandoned much of any notion of a spring hike."
Avery Shenfeld, the chief economist at CIBC World Markets, agreed, moving back his forecast for a rate hike to July, from his initial projection of May. He cited three reasons:
- The loonie will probably stay firm given high oil prices.
- Bank of Canada Governor Mark Carney may be "reluctant" to even signal a May rate hike at his next meeting in April.
- Softer core inflation amid 7.8-per cent unemployment could prompt Mr. Carney to raise his estimate of "potential" economic growth.
Over all, economists believe that Canada's fiscal standing will trump any uncertainty surrounding an election, which should leave the loonie in a strong position.
"Political uncertainty will be a looming question, however the global market has become quite comfortable with Canadian elections, the differences (or lack of) in our parties and a minority government," said Scotia Capital currency strategist Camilla Sutton. "Accordingly, we think in the medium term the focus should reside more with the strong sovereign position in Canada and less with political uncertainty."
Carl Weinberg, the chief economist at High Frequency Economics in Valhalla, N.Y., told his clients today that there wouldn't be a "sea change in power" if an election is called, and deficit-reduction will still be on the table regardless of what happens.
"Anything can happen at the polls, and the resulting budget is likely to differ in some respects from the plan outlined yesterday," he said. "However, fiscal austerity will be a key part of the platform of any party that wants to form a government Up North. So we see an election as neutral for the loonie and the bond market."
Britain faces tougher times Put Canada in perspective. Britain's finance minister George Osborne today released new forecasts from the Office for Budget Responsibility projecting growth of 1.7 per cent this year and 2.5 per cent next, lower than earlier forecasts.
Inflation is expected to hover between 4 per cent and 5 per cent this year, dipping back to 2.5 per cent in 2012. That would still be above the Bank of England's target, leaving the central bank with troubling inflation levels amid slower growth.
Japan pegs costs at $310-billion According to government estimates today, the disaster that struck Japan is now the world's costliest, which speaks to the huge task of reconstruction.
At an estimated $310-billion (U.S.), it would top losses from other natural disasters, and could go even higher given the impact on power usage as a result of the nuclear crisis.
"This quake will cause the condition of Japan's economy and output to be severe," Bank of Japan Governor Masaaki Shirakawa told a parliamentary committee, according to Reuters.
Teck trims outlook Teck Resources Ltd. says labour troubles and harsh weather will affect its coal and copper sales, but it sees little impact on its outlook from the devastatation in Japan.
Late yesterday, the Vancouver-based miner cut its projections for coal shipments to between 23.5 million and 24.5 million tonnes this year, down from an earlier forecast of 24.5 million to 25.5 million, because of labour woes at its Elkview operation and "unusually difficult winter weather conditions" that have hit production and shipments in the current quarter.
It also projects copper sales in the range of 330,000 tonnes to 340,000 tonnes because of weather conditions, as well.
"As a result of the recent earthquake and tsunami in Japan," the company added, "Teck has carried out an initial review with our customers and currently expects minimal impact to the shipment of our core commodities of copper, steel-making coal and zinc to Japan."
Boyd Erman's Morning Meeting How bad is it to be a bricks and mortar bookseller in the U.S. these days? So bad that Barnes & Noble Inc. is said by Bloomberg to be close to ending its sale process with no buyers, Streetwise columnist Boyd Erman writes.
In Economy Lab today
Even as the Libyan war just gets underway, the economic war over Libya's treasures has already begun, European correspondent Eric Reguly reports today.
The Tory budget is one meant to showcase the Conservatives' steady hand on the economic and fiscal tiller, something that cannot be said for most other industrial countries these days, Brian Milner says.
The party that forms the next government will have to implement a combination of tax increases and spending cuts on the order of $12-billion to $14-billion, economist Stephen Gordon calculates.
A new Sovereign Fiscal Responsibility Index suggests Canada isn't quite the bastion of fiscal management that its leaders describe, Washington correspondent Kevin Carmichael reports.
In Personal Finance today
In this week's Cash Clash, a Calgary family wonders if it's worth it to rent in city or whether they should return to commuting. Financial expert Kelley Keehn weighs in.
Gift-givers want an emotional connection with the recipient, so those who request cash gifts need to make it clear how the money will be spent, etiquette expert says.
From today's Report on Business