Economic Snapshot: Canada

Howdy, forex buddies! The Loonie has been tracking oil’s price action for the most part, especially after OPEC revealed its plans to cut oil production. But if you’re wondering how the Canadian economy is faring lately, then this economic snapshot is for you.

Note: As with all of my other Economic Snapshots, there are nifty tables at the bottom, so you can skip to those if you’re a forex trader who’s in a hurry. The bullet points provided highlight the underlying details and trends that give the numbers their proper context, however.

Growth

  • Canada’s GDP contracted by 0.40% quarter-on-quarter in Q2 2016 after posting a 0.62% expansion in Q1.
  • This is the first contraction in four quarters.
  • Moreover, the current reading is also the poorest quarterly reading since Q2 2009.
  • But as I noted in last month’s economic snapshot, the BOC has been warning about the possibility of a negative reading because of the Alberta wildfires, so the economic contraction is widely expected.
  • On an annual basis, Canada’s Q2 GDP grew by 0.88%, slowing from the previous quarter’s 1.16% rate of expansion.
  • Looking at the details of the GDP report, the quarter-on-quarter reading became negative primarily because of the 2.9% contraction in industrial production (+0.6% previous).
  • The downturn in industrial output, in turn, was due mainly to the 6.7% slump in mining and oil and gas extraction (+0.3% previous), as well as the 1.2% drop in manufacturing output (+0.7% previous).
  • Using the expenditure approach, the main drags to the quarterly reading were the 0.12% slide in gross fixed capital formation (-0.11% previous) and the 4.45% slump in exports (+1.94% previous).
  • Gross fixed capital formation (net investment) has been in negative territory for six consecutive months as of Q2 2016.
  • The fall in gross fixed capital formation has been due mainly to declining investment on non-residential structures and industrial machinery and equipment.
  • For the weaker year-on-year reading, that was due to the 4.92% drop in exports, which is a harder drop compared to the previous 0.85% slide.
  • On a more upbeat note, Canada’s GDP grew by 0.5% month-on-month in July.
  • This is better than the +0.3% consensus, and is a sign that Q3 GDP started on a strong footing.

Employment

  • The Canadian economy generated 26.2K jobs in August after shedding 31.2K jobs previously.
  • This is the best reading in five months.
  • Looking at the details of the jobs report, the net increase in employment was due to the 52.2K increase in full-time jobs, which was partially offset by the loss of 26.0K part-time jobs.
  • The increase in full-time jobs is great because full-time jobs generally offer better pay and security.
  • However, what’s not so great is that the 52.2K increase in full-time jobs in August is still not enough to cancel out the loss of 71.4K full-time jobs back in July.
  • Moving on, Canada’s jobless rate ticked higher from 6.9% to a four-month high of 7.0%, despite the net increase in jobs.
  • Canada’s jobless rate has been increasing for two straight months running as of August.
  • The uptick in the jobless in August was due to the labor force participation rate also ticking higher from 65.4%, a low not seen since November 1999, to 65.5%.
  • At the same time, the number of unemployed people increased from 1,345K to 1,361K.
  • This means that the Canadian economy was not able to absorb the influx of workers who joined or rejoined the labor force.

Inflation

  • Canada’s headline CPI fell by 0.2% month-on-month in August, which is the same rate of decline as in July.
  • This marks the second month of negative monthly readings after seven consecutive months of increases.
  • The monthly decline in August was primarily because of the 0.6% slide in the price of food items (+0.3% previous), as well as the 0.5% fall in transportation costs (-1.6% previous).
  • Food and transportation respectively account for 16.41% and 19.10% of Canada’s headline CPI.
  • Year-on-year, headline CPI increased by 1.1%, which is slower than July’s 1.3% rate of advance.
  • This is the lowest annual reading in 10 months.
  • The lower reading was due mainly to the lower increase in the price of services (+1.8% vs. +2.1% previous) and food (+1.1% vs. +1.6% previous).
  • For reference, services account for 53.32% of CPI.
  • The slower increase in the cost of services is also the primary reason why the core reading, which strips energy and food prices, took a hit (+1.8% vs. +2.1% previous).
  • This is the lowest annual core reading in 25 months.

Business Conditions & Sentiment

  • For the month of August, the RBC-Markit manufacturing PMI reading came in at 51.1, which is lower than July’s 51.9.
  • This marks the sixth consecutive month that the PMI reading has been above the 50.0 stagnation level.
  • However, the reading for August is a six-month low.
  • According to commentary from the PMI report, survey respondents pointed to “generally subdued client demand and a further slight reduction in new export work.”
  • Additional commentary noted that “the latest expansion [in employment] was the slowest since March.”
  • As for the more comprehensive Ivey PMI, the headline reading for August dropped from a six-month high of 57.0 to 52.3.
  • Ivey’s employment sub-index slumped from the seven-month high of 59.5 to a 17-month low of 46.9.
  • The inventories sub-index also climbed to a seven-month high of 61.2, which could mean weaker demand.
  • Meanwhile, Ivey’s prices sub-index deteriorated for the third consecutive month, coming in at 56.7, which is a four-month low and could mean weaker inflationary pressure.

Consumer Spending

  • The headline value of retail sales fell by 0.1% month-on-month in July after flattening out in June.
  • Sales declines were reported by 5 of the 11 sub-sectors.
  • In terms of volume, retail sales actually increase by 0.3% month-on-month, so the weaker reading in July was due to cheaper prices.
  • The main drag came from the 0.2% tumble in vehicle sales (+2.0% previous).
  • Motor vehicle and parts sales account for roughly a quarter of total retail sales.
  • Sales from motor vehicle and parts dealers are stripped from the core reading, which is why the reading is improved compared to last month (-0.1% vs. -0.6% previous).
  • Year-on-year, headline retail sales increased by 2.3%.
  • However, this is lower than the 2.7% reading for June.
  • The lower year-on-year reading was due mainly to lower sales of vehicles and parts (4.2% vs. 6.0%% previous).
  • Both headline retail sales readings have been deteriorating for three straight months now.
  • Both the annual and monthly headline readings have been trending lower after both peaked on January 2016.
  • And while the monthly core reading improved, it still marks the second straight month of negative readings.

Housing

  • The total value of building permits issued in July was only $6.5 billion, which is 0.8% higher when compared to the previous month.
  • The value of building permits for residential buildings fell by 2.0%, which would hopefully help alleviate Canada’s potential housing bubble problem.
  • Even better, the value of building permits for industrial buildings jumped by 17.1, which helps to reinforce the idea that the Canadian economy is recovering while slowly switching away from the energy sector.
  • Looking forward, the number of housing starts in August was only 183K, which is lower than the previous month’s 195K increase.
  • The reading for housing starts has been trending lower for two straight months now.
  • Despite the falling number of housing starts and residential building permits, the new housing price index (HPI) continued to trend higher.
  • HPI for July came in at 116.3, which is a record high.
  • HPI has been trending higher since 2009.

Trade

  • Canada’s trade deficit narrowed from $3,965.7 million, which is the widest ever on record, to $2,487.9 million in July.
  • That’s in Canadian dollars or Loonies, by the way.
  • Also, the current trade gap is the smallest in six months.
  • The narrower deficit was due to exports jumping by 3.45% to a five-month high of $43,702.7 million.
  • It also helped a little bit that imports fell by 0.12% to $45,190.6 million.
  • The jump in exports was mainly because of the 3.3% increase in exports to the U.S., Canada’s main export destination (-1.79% previous).
  • Another large jump in exports to the U.K. (+32.85%, +33.16% previous), as well as the
  • 8.30% increase in exports to China also helped (+4.02% previous).

Canadian Economy: Growth

Canadian Economy: Employment

Canadian Economy: Inflation

Canadian Economy: Business Conditions & Sentiment

Canadian Economy: Consumer Spending

Canadian Economy: Housing

Canadian Economy: Trade

Putting it all together

Canada’s economy took a hit in Q2. However, that was widely expected. After all, the BOC has been warning about the possibility of a negative reading because of the Alberta wildfires since the July BOC statement.

Looking forward, Canada’s Q3 GDP appears to be starting on a strong footing, given that GDP grew by 0.5% month-on-month in July. There’s no breakdown using the expenditure approach yet, but based on the available reports, net trade was likely the main driver, thanks to the 3.45% jump in exports. Consumer spending, meanwhile, was likely a drag, due to the weak retail sales readings. Investment on residential building will likely be a drag as well, or at least have a weaker positive contribution, given the weak readings for July and August.

Speaking of August, exports likely suffered in August, according to the RBC-Markit PMI report. The Ivey PMI report, meanwhile, is saying that Canadian industries took a hit in August, so employment and overall production may also suffer.

As for inflation, the monthly headline reading continued to fall while the annual headline reading is already at 10-month lows. The annual core reading is even worse, since the reading for August is a 25-month low. The annual headline reading is still within the BOC’s target inflation range of 1-3%, but it’s really scraping at the bottom.