The Canadian economy is labouring.
Statistics Canada on Dec. 23 reported that gross domestic product dropped 0.1 per cent in October, the first decline in eight months. Last week, it observed a drop in sales at retailers, wholesalers and factories. And the agency’s latest inflation report showed that the average of the Bank of Canada’s three preferred price measures was 2.2 per cent, the highest in a decade.
Reasons for alarm? That depends on where you were sitting when this mini-parade of numbers started rolling out.
Veronica Clark, a Citibank economist in New York who keeps an eye on Canada, advised her clients after the GDP report that the “recent string of softer data does not yet raise concerns of a substantial slowdown, but it will be important to see activity data bounce back in early 2020.”
One of the main jobs of a Bay Street or Wall Street economist is predicting the trajectory of interest rates. Clark’s bet is that the Bank of Canada will leave borrowing costs unchanged next year. Rivals who think Governor Stephen Poloz and his deputies could be forced to cut interest rates have taken a dimmer view of the latest data.
“Don’t sound the ‘all clear’ for the Canadian economy just yet, as October’s GDP results, alongside the drop we saw in November employment, casts some doubt on momentum late this year,” said Avery Shenfeld, chief economist at CIBC World Markets.
Shenfeld noted that Canada’s economy is now on track to grow at an annual rate of less than one per cent in the fourth quarter, compared with the Bank of Canada’s October estimate of 1.3 per cent. “That’s not enough to put January on tap for a rate cut, but if joined by softer jobs performance, would leave a March rate cut alive,” he said.
About those November employment numbers: the outsized drop of 71,000 should be dismissed as an outlier along with the outsized gains of 107,000 and 81,000 that StatCan’s Labour Force Survey generated in April and August, respectively. StatCan’s measure of trend hiring shows employment growth is slowing, but at a high level.
“We don’t normally put a lot of weight on individual data points, especially the labour market report, which is a very volatile report,” Poloz told reporters in Toronto on Dec. 12. “You tend to see through these things and watch the trend. And the trend has been quite a positive one for the labour market.”
Last week, the Canadian unit of Automatic Data Processing Inc., a big provider of payroll services that uses its data to generate employment estimates, said Canada added almost 31,000 jobs in November, an increase from 3,000 new positions in October and 26,000 in September. There are weak spots, particularly Alberta, but the labour market overall still has momentum, if only because the technology industry continues to rapidly expand.
“We have capacity for 200 Canadians to come on board,” Will Buckley, Canada manger at Xero Ltd., a business software firm from New Zealand that opened an office in Toronto earlier this month, said in an interview. “We want to fill this building.”
Buckley said Xero, which targets smaller companies, was oblivious to signs of slower growth. That makes sense. Sometimes decisions are bigger than simple supply-and-demand calculations. The economy is going digital and companies must pay up to join the cloud or quit.
The information-and-communication technology sector represented about four per cent of the economy when StatCan started measuring its contribution to GDP in January 2007. The segment now represents around five per cent of GDP and continues to grow. Companies that are grouped under “computer assisted design and related services” generated output of $33.5 billion in October, seven per cent more than in October 2018 and 71 per cent more than in October 2007.
Traditional manufacturers, meanwhile, are struggling around the world. The trade wars are choking investment and demand, while tariffs have diminished profit margins. But it’s possible that 2019 could represent a nadir for global manufacturing. The new North American free-trade agreement is on its way to being ratified and the Donald Trump administration and China appear to have agreed to a ceasefire in their fight for commercial supremacy. China also cut tariffs on more than 800 products that Bloomberg said were worth close to US$400 billion in 2018.
It would be wrong to assume the world is back to normal, but it would also be a mistake to conclude that factory output will continue to be as weak as it was in 2019.
The reddest flags in the latest GDP report are retail and wholesale trade, which dropped 1.1 per cent and one per cent, respectively. (The drop in retail output was the biggest in three years.) Sellers of building materials and related supplies recorded less output for the fourth consecutive month, adding colour to the decision of Lowe’s Cos. Inc. in November to close 34 “underperforming” stores. Automobile sellers also posted a decline, highlighting the trend of generally weaker sales of cars and trucks around the world.
Poloz is sensitive to signs of flagging consumption. He’s assumed for years that record levels of household debt would eventually result in less spending. But that doesn’t mean he’s prepared to shrug off evidence that his assumption is coming true. The Bank of Canada in its last policy statement of 2019 said future decisions will depend in part on whether consumer spending continues to demonstrate resilience in the face of weaker overall economic growth.
StatCan’s reports on retail sales will factor into that decision, but it’s reasonable to assume the central bank will be gathering other data. During a speech at the San Francisco Federal Reserve in November, Poloz noted that Canadian purchases on Amazon are counted in the monthly trade data. “In Canada, everybody I’m talking to shops on Amazon,” the governor said. “Amazon doesn’t meet the definition of a Canadian retailer. No bricks and mortar,” he continued. “These are conventions. It takes a long time to build the methodology to get it right.”
Amazon said last month’s Black Friday sales produced the biggest shopping day in the company’s history. Ottawa-based Shopify Inc., which makes e-commerce software for smaller companies, said its merchants generated almost US$3 billion in sales that weekend, compared with about US$2 billion in 2018.
Those are fuzzy indicators and there’s no indication of how much of that activity occurred in Canada. Still, it’s reasonable to assume that an economy at full employment did its share of Black Friday shopping. Canada probably has a little more steam heading into 2020 than the most recent data suggest.
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