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Howdy, forex buddies! Canada and the Loonie have both been under the spotlight recently because of (the perceived) hawkishness of certain BOC officials. And if that made you wonder how Canada’s economy is doing lately, then today’s Economic Snapshot is just for you.

Growth

  • Canada’s GDP expanded by 0.9% quarter-on-quarter in Q1 2017.
  • At an annualized quarter-on-quarter rate, Canada’s GDP grew by 3.7% in Q1.
  • This is just a tick slower than the BOC’s forecast of 3.8%.
  • Year-on-year, Canada’s GDP grew by 2.3%, accelerating from the previous quarter’s 2.0% rate of expansion.
  • This marks the third consecutive quarter of faster annual growth.
  • Moreover, the annual rate of expansion in Q1 2017 is the fastest in 10 quarters, which is great.
  • Just as great is the fact that Canada’s annual growth rate of 2.2% is a tick faster than the BOC’s forecast of 2.2%.
  • Looking at the details, the faster quarter-on-quarter growth was driven mainly by stronger household spending (1.1% vs. 0.7% previous) and business investment (+2.9% vs. -2.7% previous).
  • Going back to business investment, the increase in business is only the second increase in 10 quarters, but it is the fastest quarterly increase in business investment since Q1 2012.
  • Moving on to the year-on-year reading, the further acceleration in growth was due to stronger household spending (+3.1% vs. +2.7% previous) and the much weaker fall in business investment (-0.1% vs. -3.5% previous).
  • This is the softest annual fall in business investment since Q1 2015.
  • The main drag to annual growth, meanwhile, was weaker trade due to the fall in exports (-1.3% vs. 0.8% previous) and the rebound in imports (+1.6% vs. -1.1% previous).

Employment

  • The Canadian economy generated 54.5K jobs in May (+3.2K previous).
  • This is the largest net increase in jobs since September 2016.
  • Even better, the net increase in jobs was due to the 77.0K in full-time jobs, which were partially offset by the loss of 22.3k part-time jobs.
  • The loss in part-time jobs is unfortunate but the increase in full-time jobs is always a good sign since full-time jobs generally pay more and have better security.
  • Looking at the other labor indicators, Canada’s jobless rate deteriorate from 6.5% to 6.6%.
  • However, the labor force participation rate climbed from an eight-month low of 65.6% to 65.8%.
  • The number of unemployed Canadians, meanwhile, rose from 1,265K to 1,289K.
  • This means that the Canadian economy wasn’t able to fully absorb the influx of new and returning workers, which is why the jobless rate worsened.
  • Even so, the rise in the participation rate is a good sign for the Canadian economy.
  • As for wage growth, average hourly earnings fell by 0.77% in April.
  • This marks the second month of consecutive falls after eight consecutive months of increase.
  • Year-on-year, however, average hourly earnings rebounded by 1.29% after slowing to +0.66%.

Inflation

  • Canada’s headline CPI only rose by 0.1% month-on-month in May (+0.4% previous).
  • This is the weakest monthly increase in five months.
  • Looking at the details of the report, the main drag was the 0.7% slide in transportation costs, thanks to the 4.0% drop in gasoline prices.
  • The 1.6% increase in transportation costs was the main drive for the 0.4% month-on-month CPI increase back in April.
  • Year-on-year, headline CPI increased by 1.3% in May.
  • This is the slowest annual rise in six months.
  • Moreover, the slower annual increase in CPI was broad-based since all components printed slower increases, with only the price of alcoholic beverages and tobacco products printing a faster increase (+2.5% vs. +2.3% previous).
  • The price of food items, meanwhile, printed a weaker annual fall (-0.1% vs. -1.1% previous).
  • The broad-based slowdown is likely the reason why two out of the BOC’s three preferred measure for the core reading continued to trend lower.
  • To be more specific, the trimmed mean CPI ticked lower from +1.3% to +1.2% while the weighted median CPI slowing from +1.6% to +1.5%.
    Both readings have been trending lower for four consecutive months already.
  • As for the common component CPI, it held steady at 1.3%.

Business Conditions & Sentiment

  • The RBC-Markit manufacturing PMI reading for May eased from 55.9, which is the highest reading since April 2011, to 55.1
  • The PMI reading has been above the 50.0 stagnation level for 15 consecutive months now.
  • However, the lower reading in May puts an end to seven consecutive month of improving readings.
  • According to commentary from the PMI report, the lower reading was due to output, new orders, and employment all increasing “at slightly slower rates than in April.”
  • The comprehensive Ivey PMI for May is even more dour since it dropped from 62.4, which is the best reading since January 2016, to 53.8, which is the worst reading since August 2016.
  • The sub-indices for the Ivey PMI also corroborates the anecdotal evidence gathered by RBC-Markit, since Ivey’s employment sub-index fell from 53.7 to 50.4.
  • In fact, all sub-indices took hits, with the prices sub-index taking the biggest hit since it plunged from 70.9 to multi-year low of 51.3.

Consumer Spending

  • The headline value of retail sales in Canada increased by 0.8% month-on-month in April (+0.5% previous).
  • This managed to beat expectations for a 0.3% increase.
  • Moreover, the increase in retail sales was not broad-based since 9 of the 11 store types reported higher sales.
  • Given the broad-based increase in retail sales, the core reading, which strips sales from vehicles and parts dealers, printed a 1.5% increase, soundly beating expectations for a 0.6% increase.
  • Year-on-year, headline retail sales surged by 7.0% (+5.1% previous).
  • This is the shared (with January 2017) biggest annual increase since February 2016.

Housing

  • The total value of building permits issued in April was $7.1 billion, which is down by 0.2% compared to March.
  • However, this is a much softer drop compared to the 4.9% reported back in March.
  • And despite the slide in the headline reading, the details are actually a bit more reassuring.
  • For one, the slide in the headline reading was due to the continuing decline in construction intentions for residential buildings (-2.5% vs. -8.3% previous), which would likely help ease Canada’s housing market problems.
  • Another is that construction intentions for industrial buildings surged by 14.6% (+12.3% previous).
  • This marks the second month of surging constructions intentions for industrial buildings.
  • The fall in construction intentions for commercial buildings, meanwhile, moderated by a bit (-3.0% vs. -7.5% previous).
  • Falling business intentions for residential buildings is apparently taking an effect on actual construction activity since the number of housing starts in May was only 194.7K.
  • The number of housing starts has been increasing at a slower pace for the second consecutive month already.
  • Meanwhile, Canada’s new housing price index (NHPI) continued to trend higher.
  • NHPI for January increased by 0.8% month-on-month to 101.5.
  • NHPI has been trending higher since 2009.

Trade

  • Canada trade deficit narrowed from $935.8 million to 370.3 million in April.
  • That’s in Canadian dollars or Loonies, by the way.
  • This marks the third month of deficits after three consecutive months of surpluses.
  • The smaller trade gap in April was due mainly to the weaker rise in imports (+0.6% vs. 2.1% previous).
  • Exports in April, meanwhile, actually increase at a weaker pace compared to March (+1.8% vs. +3.2% previous).
  • However, trade printed a deficit nonetheless because imports increased by 1.7% after a paltry 0.1% increase previously.
  • Year-on-year, exports surged by 14.7%.
  • This is the fastest annual increase since November 2011.

Putting it all together

Source: BOC's April Monetary Policy Report
Source: BOC’s April Monetary Policy Report

Canada’s GDP growth accelerated in Q1 2017. Even so, the annualized quarterly growth rate of +3.7% did miss the BOC’s forecast of +3.8%.

The BOC is probably not too worried, though, since the year-on-year reading came in at +2.3%, which is a tick faster than the BOC’s forecast of +2.2%.

Inflation has been missing the BOC’s forecasts by a wide margin, though, since headline CPI came in at 1.6% in March, which is below the BOC’s forecast of +2.0%.

Looking forward, the BOC expects inflation to come in at 1.7% by the end of Q2. However, the CPI reading for May came in at 1.3%, which is way off the BOC’s forecast.

Worse, the weakness in CPI increases was broad-based. Worse still is the fact that two of the BOC’s preferred measures for the core reading have been trending lower, which further highlights the broad-based weakness in inflation.

Moving on to GDP, the BOC expects GDP growth to moderate in Q2. Looking at the available components, however, it looks like Canada is off to a promising start in Q2 since retails sales surged in April while the trade deficit narrowed, also in April.

PMI readings are signaling that things don’t look so swell in May, though, for both inflation and growth. Also, wage growth printed the second monthly decline in May, which may translate to weaker consumer spending and inflationary pressure down the road.

Even so,  construction intentions for industrial buildings have been surging, which is an early indicator that business investment is picking up. And that’s a bright spot for the future of Canada.

And as a bonus, construction intentions for residential buildings have been falling. Sure, that will likely have a negative effect on GDP growth, but that will also likely help to ease Canada’s housing market problems down the road.