Canadian Economy Showing Weakness Despite Employment Gains
The Bank of Canada was caught off guard last week by surprisingly weak economic data
Doubts raised last week by the Bank of Canada about future interest-rate hikes and its prediction of a longer slump came after governing council was caught off guard by surprisingly weak data in a recent report, one of its top officials said.
The Bank of Canada maintained its trend-setting interest rate at 1.75% on March 6, as expected.
However, in an accompanying statement, the bank expressed considerable doubts about the timing of future increases and warned the first half of 2019 is on track to post weaker-than-expected results.
During a speech in Hamilton last Thursday, deputy governor Lynn Patterson said the Bank of Canada’s policy-makers had been expecting a growth slowdown in the energy sector over the final three months of 2018, particularly after the oil-price drop late in the year.
Governing council members had not been anticipating Statistics Canada’s GDP data on March 1st to show a sudden deceleration in other categories as well, Patterson said.
The country’s economy grew by just 0.1% in the fourth quarter, for an annualized pace of 0.4%, Statistics Canada said. That’s the worst quarterly performance in two and a half years, down from annualized 2% in the third quarter and well below economist expectations for a 1% annualized increase.
While a slowdown was widely expected in the final months of the year due to falling oil prices, it’s a much bleaker picture than anyone anticipated with weakness extending well beyond the energy sector.
Consumption spending grew at the slowest pace in almost four years, housing fell by the most in a decade, business investment dropped sharply for a second straight quarter, and domestic demand posted its largest decline since 2015.
The only thing that kept the nation’s economy from contracting was a build-up in inventories as companies stockpiled goods.
For all of 2018, the economy grew by 1.8% — below the Bank of Canada’s estimate for 2%. Monthly data showed the economy ended the year contracting, with December GDP down 0.1%.
“Although we figured the economy was in for a detour at the end of last year, that detour may wind up being longer than we had expected,” she said in the speech, which was to be delivered to the Hamilton Chamber of Commerce.
“While the anticipated slowdown from the energy sector was fairly aligned with our projections, other categories surprised.”
Patterson and her fellow decision-makers were confronted by unexpectedly soft fourth-quarter numbers in the areas of business investment, exports and household spending, she said.
She repeated a line from the central bank’s statement that said there was “increased uncertainty” about the timing of future rate hikes.
Many analysts don’t expect the central bank to raise the benchmark until at least late 2019 — and some have started to suggest a rate cut could arrive before the next increase.
The bank’s policy decision and statement last week also came after governing council factored in the slowing global economy, which has been affected by trade tensions — particularly those between the United States and China — and other uncertainties, Patterson added.
“Some major central banks have changed their communications in recognition of softer global economic momentum,” she said before offering a hint of the closed-door deliberations behind the decision.
“Here at home, Canadian data are reflecting this slower global momentum. In that regard, governing council spent a lot of time discussing the national accounts data for the fourth quarter of last year.”
Looking ahead, however, Patterson said the Bank of Canada is optimistic that economic growth will build new momentum in the second half of 2019, thanks in large part to the still-strong employment conditions and improving wages.
In fact, Canada’s economy posted its second-straight surprise job gain, making the labour market a lone bright spot for an economy in the middle of a sharp slowdown.
Employment increased by 55,900 in February, all full-time jobs, Statistics Canada reported last Friday, building on a 66,800 gain in January. The two-month gain is the best start to a year since 1981. Canada’s economy has added 290,000 jobs since August, the largest six-month increase since the early 2000s.
The employment gains in recent months come amid an otherwise dismal performance for the economy recently, amid stresses in the oil sector, weakening housing markets, volatility in global financial markets and waning consumer and business confidence. Economists were forecasting a gain of just 1,200 in February.
The jobs increase largely reflects higher labour force numbers, rather than falling unemployment, due to rising participation rates and accelerating population growth over the past couple of years. Much of the increase in Canada’s population comes from international working-age migrants. In an economy with more than half a million vacant jobs, many seem to be finding work.
The labour force increased by 55,100 in February, and is up by 159,000 so far this year. Canada’s unemployment rate was unchanged at 5.8%, even with the employment gains, because more people were looking for work.
The breakdown in the numbers was also positive, with 67,400 new full-time jobs offsetting a loss of 11,600 part-time positions.
Even the wage picture is looking better. Annual average hourly gains accelerated to 2.3% in February from 2% a month earlier, with pay for permanent employees up 2.2%, from 1.8% previously.
One weakness was total hours worked, which fell 0.1% in February from a year earlier.
Source: The Canadian Press