Mixed signals

The Bank of Canada and private sector analysts agree that the rapid growth in the Canadian economy in the first half of this year will not persist through the latter half of the year, and a slower pace is expected to persist through 2018 and 2019.  On the surface, key economic data released this weak only partly support this outlook, with strong employment data offset by a weak international trade report.  However, on balance it remains likely that the Bank will leave rates unchanged when its Governing Council meets at month-end.

The headline employment number for September was unremarkable: an increase of 10,000 jobs, in line with the consensus expectation.  However, the numbers behind the headline were much more extreme: an increase of 112,000 in full time employment (one of the biggest monthly increases on record) offset by a decline of 102,000 in part-time employment.  If we take these numbers at face value, the job market was a lot stronger in the month than the headline number makes it appear.  However, such wide and offsetting swings inevitably revive questions about the reliability of the data.

A further quirk in the underlying numbers also raises eyebrows.  Supposedly there was an increase of 25,000 in the number of males over the age of 55 working, and most of the job gains were full-time. Yet it is also reported that employment for males in the 25-54 age group fell by 29,000 in the month, with all of these losses being part time jobs.  There is no obvious explanation for these wildly divergent trends between the two age cohorts, which adds to the difficulty of assessing the overall direction of the labour market.   

The international trade data (for the month of August) are much less ambiguous: they're simply bad.  Canada's deficit in good trade widened to C$3.4 billion in the month from $3.0 billion in July.  The deterioration was entirely due to weakness in exports, which fell by 1.9 percent in volume terms in the month. The export weakness was very broad-based, with shipments of everything from consumer good to chemicals declining in the month.  Export volumes have fallen in each of the past three months, the first time this has happened since 2011.  It is unlikely that the recent relative strength in the exchange rate has yet had an impact on the data, so the weakness in export volumes may well persist for the remainder of the year.

All in all this week's data, together with ongoing events, give the Bank of Canada little cause to tighten policy at its October 25 meeting.  One notable factor is an ongoing strike at a GM plant in Ingersoll, Ontario.  This is leading to layoffs among the plant's suppliers, and is also likely to have a negative impact on October export data.  News of the cancellation of the planned Energy East pipeline project, along with regular evidence that the NAFTA renegotiation process is not going smoothly, add to the signs that the economy is about to face much stiffer headwinds. It begins to look as though there will be no further rate hikes this year, and the pause in tightening may last well into 2018.