14 Apr

No Rate Cut: BoC Cautiously Ups Forecast

General

Posted by: Drummond Team

Dr. Sherry Cooper

 

Bank of Canada Cautious About the Outlook

Bank of Canada Cautious About the Outlook
 
To no one’s surprise, the Bank of Canada left its target overnight rate unchanged at 1/2 percent. The Bank, however, reduced its forecast for the global economy and for the U.S. economy as well, suggesting that the outlook for Canadian exports is less favorable than earlier forecast. (Table 1 below shows the Bank’s current global forecasts with the January forecasts in parentheses.)

While oil prices are off their lows and slightly above the level forecast by the Bank in January, the central bank now expects deeper cuts in oil sector business investment. The Bank expects crude oil prices to remain low (Chart 2). The Canadian dollar has increased sharply from its lows earlier this year, “reflecting shifting expectations for monetary policy in Canada and the United States, as well as recent increases in commodity prices.” The loonie has surged 15% in less than three months to its strongest level in since mid-2015. This, of course is bad news for exports, and the Bank played down the outlook for Canadian growth in its policy statement and Monetary Policy Report (MPR). 

The Bank suggested the surprising strength in the first quarter is in part due to temporary factors and will reverse in the second quarter. Their estimate of output growth in the first quarter is now 2.8%, below consensus private-sector estimates of 3+%, slowing to 1% output growth in the second quarter. The Bank re-emphasized that the structural adjustment to the decline in oil prices is ongoing and will dampen growth over the next three years. This is a more pessimistic, but realistic view than the Bank took a year ago. 

The Bank’s forecast for growth this year and next is significantly less optimistic than many market watchers expected, especially in light of the recent strengthening in the employment and monthly GDP data. The Bank’s Governing Council suggested that had it not been for the recent budget’s fiscal stimulus, the growth outlook would have been revised down from the January outlook. Including the effects of the budgetary easing, the Bank now forecasts Canadian growth this year at 1.7%, next year at 2.3% and and 2.0% in 2018. Slower foreign demand growth, the higher Canadian dollar and a downward revision to business investment all have negative impacts on the outlook but are more than offset by the positive effects of the fiscal measures announced in the federal budget in March.

The Bank of Canada also revised down its estimate of potential growth in the economy to roughly 1.5%, mainly reflecting slower growth in trend labour productivity as a result of weaker investment. The new growth profile, combined with the revised estimate for potential, suggests the output gap could close somewhat earlier than the Bank had anticipated in January, likely in the second half of 2017. Inflation is expected to remain at or  below the target rate of 2%.

Bottom Line: Caution is the watchword for today’s Bank of Canada policy report.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

14 Apr

Better Than Expected Canadian March Jobs Report

General

Posted by: Drummond Team

Dr. Sherry Cooper

 

Canada’s Jobs Report Dwarfs Forecasts

Canada's Jobs Report Dwarfs Forecasts
 
Following three months of little job growth, economists expected to see a modest 5,000 increase in employment in March. The jobless rate was forecast to hold steady at 7.3%, matching the highest level in over 3 years. Surprise!  March came in like a lion, with employment up 41,000 (+0.2%)–the strongest reading in five months. This lowered the unemployment rate by 0.2 percentage points to 7.1%.

The first quarter posted a gain of 33,000 jobs, the fourth quarter in a row of 0.2% growth. 

Payroll gains were posted in Alberta, Manitoba, Nova Scotia and Saskatchewan. At the same time, employment declined in Prince Edward Island and was little changed in the other provinces. Alberta, ground zero for the oil crisis, recorded 19,000 net new jobs, taking the unemployment rate down 0.8 percentage points to 7.1%–still up sharply from a year ago. The gain was driven by increases in retail and wholesale trade. Despite the employment increase, the total number of hours worked in March declined by 0.7%, a nosedive that began early last year.

The divergence in provincial fortunes clearly continues. BC remains the leader, with the fastest payroll growth and strongest economy. On a year-over-year basis, gains totalled 72,000 in BC, up 3.2%. The jobless rate is unchanged at 6.5%. The second strongest province in the past year is Ontario with job growth of 1.2% and a jobless rate of 6.8%.

All of the employment gains in March were in the private sector. Manufacturing was the one area of weakness, posting declines of 32,00, with losses in Ontario, Quebec, Alberta and British Columbia. On a year-over-year basis, employment in manufacturing was little changed, as gains in Ontario and Nova Scotia were offset by losses in Alberta.

Unfortunately, the pain in the oil sector is not over yet. Second-round effects will hit payrolls through mid-year as oil production and business investment in that sector continues to decline.

Today’s stronger-than-expected labour market report follows on the heels of last week’s dazzling reading on January GDP. The data were well above expectation, causing many Bay St economists to raise their first quarter GDP forecasts to over 3.0 percent–well above the less than 1.0% reading in the final quarter of last year. Earlier this week, the trade numbers for February were released and disappointment reigned once again as the Canadian trade deficit widened sharply. Exports fell 5.4% alongside a  14.4% nosedive in energy shipments. Imports also slumped a more modest 2.6%, with the vast majority of major product categories lower in February.  Nonetheless, net exports are still on pace to add to economic growth again in the first quarter, as the rotation in the Canadian economy continues.

Bottom Line: the Canadian economy is improving and is likely to grow at just under 2% this year. This will keep the Bank of Canada on the sidelines. South of the border, U.S. growth is likely to be just over 2%, with the Fed, though cautious, raising rates later this year.

Canada's Jobs Report Dwarfs Forecasts

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres