Canada's GDP grew 0.6 percent in January, the strongest monthly gain since 2013. This was twice as fast as the analysts' consensus had predicted a failure that is frankly a bit puzzling, considering that StatsCan had reported just a couple of weeks ago that industrial production rebounded very sharply in the same month.
Sure enough, the details of the StatsCan report show that the goods-producing sectors led the way in January. Manufacturing output jumped by 1.9 percent in the month, and has now gained more than 3 percent in just the last two months. Durable goods output is especially strong, which signals an ongoing revival in the traditional heavy manufacturing heartland of southern Ontario. Needless to say, this rebound is largely the result of the weakness of the exchange rate, which has given a strong boost to exports.
Aside from manufacturing, strength in the economy was broad-based. Retail trade, utilities and finance all posted solid gains, So, remarkably, did the oil and gas sector, with extraction of non-conventional oil rising. There was even a modest increase in demand for drilling services, which may suggest that the oil patch is growing more confident that the worst has passed for oil and gas prices.
The recent evidence of a rebound in the Canada's economy, combined with this week's dovish noises from Fed Chair Janet Yellen, have allowed the Canadian dollar to extend its recent gains. At the time of writing, the exchange rate is trading above 77 cents (US), its highest level so far in 2016 and well above the lows near 68 cents that were plumbed in mid-January.
This is where things get tricky for the Bank of Canada. Governor Stephen Poloz has never quite come out and advocated a weak exchange rate, but it's been perfectly clear that the Bank has been looking for improved competitiveness to help rebalance the economy away from its excessive dependence on resource production. So far, so good, it would appear, but the Bank must now be starting to worry whether the currency's 10 percent rally over the past two months will begin to reverse that competitive advantage.
The unexpectedly cautious note struck by Dr Yellen this week makes that judgment call even harder. The Fed's current stance could well push the CAD (and AUD and NZD, among others) higher, even if the momentum in Canada's non-oil exports starts to fade. Yet there is little that the Bank of Canada can do to lean against exchange rate strength, given the risks that even easier monetary policy would pose for the domestic economy.
Just last week, StatsCan reported that Canadian households' debt-to-income ratio rose to 165.4 percent in the final quarter of last year, yet another all-time record. Gov. Poloz has seemed to wash his hands of any responsibility for this in the past, but the Bank must be acutely aware of how quickly things could go awry once interest rates finally start to rise.
If the revival in growth is a mixed blessing for the central bank, it's unequivocally great news for Finance Minister Bill Morneau. The budget he tabled last week contained a remarkable number of cushions, including a huge $ 6 billion contingency provision, an improbably low oil price forecast and a projected GDP growth rate of just 0.4 percent per annum. That's right -- Morneau is basing his projections on a growth rate for all of 2016 (and each of the next four years) that's lower than the economy achieved in January alone. It's already looking very likely that faster growth will push revenues much higher than Morneau has forecast, giving him a windfall that will allow the new government both to boost spending a little further and bring the deficit in well under target.
No comments:
Post a Comment