Monthly Economic Review: Canada

Forex traders sold off the Loonie almost immediately after the Bank of Canada (BOC) lowered the benchmark rate from 0.75% to 0.50%. According to the official BOC statement, rates were cut because the “lower outlook for Canadian growth has increased the downside risks to inflation,” and a rate cut is therefore necessary to “return the economy to full capacity and inflation sustainably to target.” So, how are the numbers looking these days?

Growth

Canada’s GDP contracted by 0.1% in April (-0.2% previous), the fourth consecutive month of contraction. Looking at the components of the report, it’s pretty clear that the decline was brought about by a 2.6% drop in the mining, quarrying, and oil and gas extraction sectors. It’s also worth noting that these sectors have been contracting for six consecutive months now. The finance and insurance sector also did some damage when it slid by 0.6%.

Canadian GDP Components

Source: Statistics Canada

These contractions were partly offset by a 1.6% jump in wholesale trade (0.9% previous) due to increased output in machinery, motor vehicles, equipment and supplies, and agricultural supplies.

Future prospects for GDP also don’t look too good since Canada’s trade deficit widened to $3.3 billion ($3.0 billion previous) in May, with exports declining by 0.6% while imports increased by 0.2%. This marks the fifth consecutive month of declining exports, which is really bad for Canada’s export-driven economy.

Canadian Trade Data

Source: Statistics Canada

Employment

The Canadian economy lost 6,400 jobs in June while the jobless rate remained essentially unchanged at 6.8%. Canadians were probably just giving up on looking for a job given that the labor force participation rate went down to 65.8% from 65.9%.

Upon closer inspection, it’s still tragic that 71,000 people lost their part-time jobs, but it ain’t all that bad for the Canadian economy since 65,000 people managed to get full-time jobs. Oops! I spoke too soon since it’s actually the public sector that created most of the jobs, with 42.2K new positions of which 9.5K were public administration jobs.

The private sector, meanwhile, actually trimmed 26.3K jobs, with the manufacturing sector losing about 7.2K jobs.  So, I guess we can expect government services to be more efficient, but I don’t think we can really expect increased economic output given the underlying employment trends.

Business Sentiment

Oddly enough, Markit’s June manufacturing PMI went up to 51.3, which indicates industry expansion, after four consecutive months of contraction. The report even states that employment numbers picked up, which contradicts the employment data gathered by the Canadian government.

Moving on, the Ivey PMI reading for June fell to 55.9 from 62.3. A closer look at the report shows that three out of four sub-components declined. The employment index, in particular, dropped to 50.7 (51.8 previous), which is in line with the Canadian government’s employment data.

Consumer Spending

Retail trade for April stumbled by 0.1% after climbing by 1.7% in February and 0.7% in March. Core retail trade also took a 0.6% tumble, wiping out its 0.5% gain in March. And based on the report, 4 of 11 sub-sectors suffered a decline.

Canadian Retail Sales

Source: Statistics Canada

Canadians seems to be laying off the booze for a while since sales at beer, wine, and liquor stores decreased by 3.4%. Canadians seem to be fasting too (or growing their own food) since sales at supermarkets and other grocery stores dropped slightly by 1.1%. But the greatest drop in sales occurred in electronics and appliance stores, with a whopping 8.8% drop. Statistics Canada blames store closures and poor timing of new product releases as the reason for the large drop.

Inflation

The headline reading for Canada’s CPI increased by 0.2% in June, much slower than last month’s 0.6% increase. Core CPI, meanwhile, showed no increase at all (0.4% previous). Year-on-year, headline CPI actually picked up the pace since it rose by 1.0% (0.9% previous).

Canadian CPI

Source: Statistics Canada

Scanning through the report, seven of the eight major components saw some gains, with food prices leading the pack at 3.4%. The only loser was transportation due to lower energy prices. And while lower energy prices still have a deflationary effect on inflation, it seems to have diminished a bit since the energy index only decreased by 9.0% (11.8% previous).

A more thorough review shows that all energy index sub-components, such as gasoline and natural gas, were in the red. The only exception was the electricity index since it jumped by 3.2% after last month’s 1.0% increase.

Summary and Potential Effects on the Forex Market

Other than GDP growth, Canada’s most recent economic figures aren’t really anything to be overly worried about… for now, at least. Then again, the recent rate cuts were meant to be pre-emptive in nature.

Looking forward, the BOC “expects growth to resume in the third quarter and begin to exceed potential again in the fourth quarter, led by the non-resource sectors of Canada’s economy.” Even so, the BOC still downgraded its GDP forecast for 2015 to a mere 1.0% growth from the initial 2.0% estimate.

So what are the likely effects on the Loonie’s forex action? Well, forex traders who are bullish on the Loonie would probably be discouraged from loading up for the medium and long-term.

In the short term, forex traders would probably see the Loonie weaken due to the latest rate cut. Apart from that, it could take a while for Canada’s economy to undergo “a significant and complex adjustment” that’s less dependent on oil exports. For now, Canada is still dependent on oil exports and there are already looming oil supply shocks (i.e. Iran nuclear deal) on the horizon.