Surprising strength

Rising interest rates, higher minimum wages and a deepening trade war would seem to be a recipe for trouble for the Canadian economy, yet data released in the last few days indicate a surprising degree of resilience.

Start with the June labour force data, released this morning by Statistics Canada.  The economy added 32,000 jobs in the month, well above the consensus expectation.  The strongest job gains were seen in Ontario, the province generally seen as most vulnerable to the risks posed by trade tensions with the United States (and the province that boosted its minimum wage by the largest amount at the start of the year). Although most of the jobs added in June were part time,  over the past twelve months essentially all of the 215,000 jobs created in the economy were full-time positions. 

One slightly jarring element of the report was the 0.2 percentage point increase in the unemployment rate, which now stands at 6.0 percent.  However, even this can be seen as a positive, since it was caused by a surge of more than 70,000 in the number of people actively seeking work.  Such a rise in the participation rate is usually a sign of improving confidence among would-be workers.

Employment is seen as a lagging economic indicator, so it can be argued that strong data for June reflect how things looked early in Q2,  before the first round of US tariffs came into place, rather than the distinctly gloomier environment we face as the second half of the year begins. The Bank of Canada's Business Outlook Survey is an altogether different sort of indicator, since it specifically asks businesses to assess what lies ahead.  The latest edition, released at the end of June, is unequivocally strong. 

Respondents to the survey reported buoyant sale prospects, continuing investment growth, rising capacity utilization and growing cost pressures, all reflected in a near-record level of business optimism.  The survey is careful to note that most of the interviews took place before the US imposed tariffs on Canadian steel and aluminum at the end of May, but given that the threat of tariffs had been in place for some time before that, it is not clear how far this timing may have affected the results.

How long can this positive mood continue?  Various analysts are starting to come up with estimates of the impact of auto tariffs, which may be the next show to drop in Trump's increasingly deranged trade war, and they're not pretty. This downright panicky analysis from the auto dealers association is more pessimistic than most, but there can be little doubt that the impact of auto tariffs, particularly in Ontario, would be very severe. As the auto makers themselves are no doubt trying to tell the US administration, the impact within the US might be even more harmful, but whether that message will get across remains to be seen.

One more thing....housing data are starting to suggest that the Toronto market is coming out of its year-long funk, with both prices and sales starting to edge higher again.  That news, coupled with the employment data, has caused the market to price in a higher probability of a Bank of Canada rate hike next week.  If the Bank of Canada really is, as Governor Stephen Poloz puts it, data driven and not headline driven, it certainly has at hand all the justification it needs to keep edging rates higher.