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How y’all doing, forex buddies! As Pip Diddy has been noting in his weekly recaps, the Loonie has been raking in gains lately.

And if that made you wonder how the Canadian economy is doing, or maybe you just want to gear up for this week’s upcoming BOC statement, then today’s Economic Snapshot is just what you need.

Note: No discussion on trade and retail sales this time around since the latest available data are for the June period, which makes a discussion on those two practically moot, given that the Q2 GDP report has already been released and the GDP report already incorporates retail sales and trade. Also, my fingers hurt from all that typing.

Growth

  • Canada’s GDP growth has been rather impressive lately
  • Canada’s Q2 GDP grew by 1.1% quarter-on-quarter.
  • At an annualized quarter-on-quarter rate, this translates to around +4.5%.
  • This is the strongest quarterly growth since Q3 2011.
  • This also marks the second month of ever stronger quarterly growth.
  • Moreover, this soundly beats the BOC’s upwardly revised Q2 growth forecast of +3.0% quarter-on-quarter annualized.
  • Wowzers!
  • Year-on-year, Canada’s GDP grew by 3.7%.
  • This is the strongest year-on-year reading since Q1 2006!!!
  • This also marks the fourth consecutive quarter of ever stronger readings for annual growth.
  • The year-on-year reading for Q2 is also much better than the BOC’s upwardly revised forecast of +3.4%.
  • Again, wowzers!
  • Looking at the details, the faster quarter-on-quarter (not annualized) growth was driven mainly by net trade since exports picked up the pace (+2.3% vs. +0.4% previous) while imports weakened (+1.8% vs. +3.7% previous).
  • This was able to more than offset the weaker increase in gross fixed capital formation (+0.5% vs. +2.5% previous).
  • The weakness in gross fixed capital formation, in turn, was due to the slump in residential investment (-1.2% vs. +2.9% previous) and the weakness in business investment (+1.7% vs. +3.3% previous).
  • However, the slide in residential investment is actually kinda good for Canada’s housing market problem.
  • And while the growth in business investment eased, it still marks the second consecutive quarter of growth after declines in 8 of the past 9 quarters.
  • Also worth noting is that consumer spending remained robust in Q2 but was a tad weaker compared to Q1 (+1.1% vs. +1.2% previous).
  • Even so, stronger government spending was able to offset the weakness in consumer spending (+0.6% vs. +0.3% previous).
  • Year-on-year, the stronger growth in Q2 was also driven mainly by net trade, thanks to the surge in exports (+5.2% vs. -0.9% previous) easily outpacing the bigger increase in imports (+3.5% vs. +2.0% previous).
  • Consumer spending also strenghtened on a year-on-year basis (+3.8% vs. +3.3% previous).
  • The same can be said of gross fixed capital formation (+1.3% vs. +0.4% previous).
  • And among the sub-components for gross fixed capital formation, the 1.0% increase in business investment is the most noteworthy since it’s the first year-on-year increase in business investment since Q4 2014.

Employment

  • The Canadian economy only generated 10.9K jobs in July (+45.3K previous).
  • This is the smallesy net increase in jobs in three months.
  • The weaker jobs growth was due to the 24.3K decrease in part-time jobs partially offsetting the 35.1K increase in full-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 improved further from 6.5% to 6.3%.
  • This is the lowest jobless rate since October 2008.
  • However, the downtick in the jobless rate was partially due to the labor force participation rate easing from 65.9% to 65.7%, which isn’t so great.
  • Even so, the number of unemployed Canadians did fall from 1,270K to 1,247K, so the fall in the jobless rate was still somewhat healthy.
  • As for wage growth, average hourly earnings fell by 0.35% in July after flattening out in June.
  • But on a more upbeat note, the average hourly earnings picked up the pace by printing a 1.30% year-on-year increase (1.29% previous).
  • This is a fastest annual reading in five months after wage growth bottomed out at 0.66% back in April.

Inflation

  • Canada’s headline CPI was flat month-on-month in July after falling by 0.1% in June, which was the first negative reading after five consecutive months of rises.
  • CPI was flat in July because the price of clothing and footwear was steady after falling by 2.2% previously while the slide in the cost of energy slowed (-0.6% vs. -2.0% previous).
  • These were able to offset the 0.1% decline in the cost of shelter and the 0.4% fall in the cost of household operations, furnishings, and equipment.
  • Year-on-year, headline CPI rose by 1.2% in July.
  • This is the first uptick in six months and is a welcome recovery after headline CPI fell to a 20-month low of 1.0% back in June.
  • Also, the BOC expects headline inflation to average around 1.3% by the end of Q3 2017.
  • And as of July, headline CPI averaged 1.54%, so average inflation is still better than the BOC’s forecast.
  • Perhaps more importantly, two of the BOC’s three preferred measures for inflation ticked higher, which is a good sign for underlying inflation.
  • Specifically, trimmed mean CPI ticked higher from 1.2% to 1.3%.
  • This is the first uptick in six months.
  • The weighted median CPI, meanwhile, accelerated to 1.7% after printing a steady 1.6% rise in the past three months.
  • This is the first uptick in 16 months.
  • As for the common component CPI, it maintained the previous month’s pace of 1.4%.

Business Conditions & Sentiment

  • The headline reading for Ivey PMI eased from 61.6 to 60.0.
  • Most sub-indices took hits, which is why the headline reading faltered, but it’s worth noting that the prices index jumped from 57.4 to a six-month high of 69.2.
  • Looking forward, RBC-Markit manufacturing PMI reading for August stumbled from a four-month high pf 55.5 to a seven-month low.
  • The weaker reading was due to new orders growing at the weakest rate in 2017 so far and exports growth easing from July’s strong levels.
  • Even so, commentary from RBC-Markit remained upbeat overall.
  • For example, anecdotal evidence pointed to “the sharpest round of job creation in the series history.”
  • And more importantly for inflation, “another sharp rise in average selling prices amid rising client demand.”

Housing

  • The total value of building permits issued in June was $8.1 billion, which is 2.5% higher compared to May.
  • This is a smaller increase compared to the 10.7% surge in May, but it still marks the second months of increases after the straight months of declines.
  • The weaker increase was mainly due to the 0.9% slide in residential building permits (+10.8% previous).
  • And the slide, while a bad sign for residential building investments and GDP growth, does help to aleviate Canada’s housing market problems at least.
  • Even though construction intentions for residential buildings fell in June, the number of housing starts in July was 222.324K units, which is more than the previous month’s 212.948K increase.
  • This is the biggest increase in four months and is a good start for residential building investment in Q3.
  • Going back to building permits issued, a much more more important piece of data is that non-residential building intentions improved further in June (+8.8% vs. +5.6% previous), which may translate to stronger business investment down the road.
  • As for Canada’s new housing price index (NHPI), it continued to trend higher, increasing by 0.2% to 102.4.
  • This means that, on the surface at least, Canada’s housing market problems haven’t deteriorated yet since home prices continue to rise.
  • NHPI has been trending higher since 2009.

Putting it all together

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

Canada’s GDP growth has been impressive lately. The pace of GDP growth in Q2, in particular, was really impressive since that was the strongest quarterly growth since Q3 2011 and the strongest year-on-year growth since Q1 2006.

Much more importantly,  the quarter-on-quarter annualized rise of 4.5% easily tramples the BOC’s (already upwardly revised) forecast of +3.0%. The year-on-year reading of 3.7%, meanwhile, easily beats the BOC’s forecast of 3.4%.

Another very important point is that business investments continue to grow, and higher construction intentions for non-residential buildings imply that they’ll continue to grow, which will be very good for Canada’s growth potential down the road.

Also, residential construction intentions continue to weaken, which is a bad sign for residential building investments. But on the bright side, lower housing supply does help to ease Canada’s housing market problems.

Overall, the Canadian economy is growing at a better-than-expected pace. But what about inflation?

Well, monthly inflation fell in July, partly because of electricity rebates in Ontario. However, things still look good since the 1.2% year-on-year increase in July headline CPI brings average CPI to around 1.54%, which is a good start for Q3 and is beating the BOC’s forecast that average CPI will ease to 1.3% in Q3.

And more importantly, two of the BOC’s three preferred measures for inflation ticked higher in July, with the remaining measure holding steady after ticking higher previously.

This is a good sign for underlying inflation and may be enough to make the BOC sound more hawkish and has even made some forex traders expect another BOC rate hike before the year ends.

Looking forward, prospects for inflation look upbeat since the Ivey price index jumped higher in July and RBC-Markit is saying that companies are passing on higher costs to consumers, at least in the manufacturing sector.

As for the labor market, conditions continue to tighten, but wage growth remains subdued year-on-year and even fell month-on-month in July. But there was a promising uptick for the year-on-year reading.