Canadian economy: still edging ahead

Statistics Canada reported this morning that the Canadian economy added 11,200 jobs in October.  While this was marginally below the consensus expectation for a gain of 15,000, it was sufficient to push the unemployment rate down to 5.8 percent, matching a four-decade low, in part because labour force participation edged lower.  The economy has added 205,000 jobs in the past year, with 173,000 of these representing full-time positions.

Full-time jobs more than fully accounted for the October increase in employment.  There were 34,000 full-time positions created in the month, offset by a decline of about 22,000 in part-time employment.  Here, however, we have to enter one of the caveats that often accompany Canadian employment data: by StatsCan's reckoning, most of the new full-time jobs (approximately 22,000) in fact represented self-employment, a category that shows remarkable volatility from month to month.  Reflecting the moderation in employment gains in recent months, the year-on-year rise in average earnings fell marginally to 2.2 percent.

A second report from StatsCan today suggested that Canada's international trade sector is largely stagnant, but the data need to be interpreted carefully.  Imports reportedly fell 1.5 percent in volume terms in September, which could be a sign of sluggish domestic demand, but the decline largely reflects the fact that StatsCan had to revise August import data sharply higher because of the late reporting of some major transactions.  Exports were marginally lower in the month, a result of declining sales to countries other than the United States.  However, with the US economy powering ahead and NAFTA uncertainties seemingly lifted, prospects for export growth remain positive.

Earlier in the week, StatsCan reported that real GDP rose 0.1 percent in August, its seventh consecutive monthly gain.  This was above the consensus expectation for no change in the month, but in truth details of the report were not strong.  All of the increase was the result of higher output in the services sector, mainly finance and insurance.  The goods-producing sector was essentially flat in the month, despite gains in oil and gas extraction.

What are the policy implications of this week's reports?  It is becoming more apparent that the Canadian economy is lagging further behind that of the US, which continues to benefit from the sugar rush provided by Trump's tax cuts.  That underperformance may well be seized on by Finance Minister Morneau as justification for continued deficit spending when he tables his Fall Fiscal Update on November 21. As for the Bank of Canada, the data suggest that there is no real pressure to move interest rates rapidly toward more neutral settings.  If the Bank's actions are data-dependent, this week's data clearly suggest further tightening will lag behind the pace set by the Federal Reserve, which implies that the exchange rate will drift moderately weaker over the winter months.