Canada’s GDP Unlikely To Recover In January

Until a few months ago, the Canadian economy was firing on all cylinders. The Bank of Canada responded with hiking interest rates while maintaining a hawkish view. But since October last year, the BoC has put a break on the rate hikes.

The Bank of Canada raised interest rates five times since 2017, but will now settle on the sidelines. The markets, on the other hand, are already starting to price in a rate cut.

The Canadian economy slowed considerably in the fourth quarter of 2018. Part of the declines came due to the lower oil prices seen during the latter part of last year.

Growth in the final three months of 2018 saw the economy grinding to a halt. Growth figures came in to show just a 0.1% increase over the three month period. This put the annual GDP growth rate to a meager 0.4%.

It was one of the worst quarterly GDP performance in two and a half years. It was also a sharp decline from the 2.0% annualized GDP growth in the third quarter.

In December, Canada’s economy was contracting 0.1% on a month over month basis. This reflects lower oil prices during the period. But oil prices are not the only reason. The construction sector was also dragging growth lower.

Canada’s construction sector was contracting for seven consecutive months until December. This underlined the view of the slowing housing market in the economy.

Will There Be an Upside Surprise for Canada’s GDP?

The latest trade balance figures make room for a bit of upside surprise.

When comparing the oil prices in January to previous months, there has been some improvement. However, given the lagging effects, it is still too early for the higher oil prices to feed into the economy.

Manufacturing sales threw a surprise, growing 0.1% on the month in January. But this comes after three consecutive months of declines previously. Most of these declines were due to lower oil prices.

Recent data from Canada saw the release of the retail sales report, which was disappointing. Retail sales fell for the third consecutive month in January, falling 0.3%. The weak retail sales dampened hopes of any optimism.

The declines were mostly due to weaker auto sales. Economists were expecting to see a pick up of 0.4% in Canada’s retail sales. General merchandise sales fell 2.4% and gas station receipts fell for a third consecutive month.

Canadian Government Announces Economic Stimulus

Just last week, the Justin Trudeau government announced an economic stimulus package. The budget released by finance minister Bill Morneau seeks to boost consumer spending.

Canada’s consumer spending has been slowing with many attributing this due to higher interest rates from the Bank of Canada. The government outlined a budget of $21 billion Canadian dollars spread across a five year period.

Measures include helping first-time home buyers, skills training and benefits for retirees and students. The budget was seen as a way to ease the pressures due to higher borrowing costs.

Canada’s housing markets have been in a slump. Home prices fell for the fifth consecutive month in February 2019. Prices for single-family homes were down 0.4% on a month over month basis.

Canada’s housing market grew hot previously but has turned weaker since the start of last year. On an annual basis, housing prices rose 1.9% in February.

January Trade Deficit Falls to $4.2 Billion

The trade balance report that came out earlier in the week saw the trade deficit shrinking to $4.2 billion in January. The decline in the trade deficit came due to a rebound in oil prices. The median forecasts indicated that trade deficit would shrink to $3.5 billion.

Exports rose by 2.9%, rising for the first time since July 2018 while imports rose 1.5% with an increase in aircraft and transportation equipment and parts.

In December, Canada’s trade balance widened from $2.0 billion in November to a revised $4.8 billion (from $4.6 billion) which was a record increase. The data could have some impact on pushing the GDP figures for January to come out perhaps slightly better than expected.