Canadian economic data look weak, but....

We have known for some time that the Canadian economy ended 2018 on a weak note, with real GDP expanding a meager 0.1 percent in the fourth quarter. Two reports released today appear to suggest that the sluggish growth pattern has persisted into the new year.

Retail sales fell 0.3 percent in January, according to data released this morning by Statistics Canada. This marked the third consecutive monthly decline, but it should be noted that this series is reported in nominal terms, so the weakness in gasoline prices that has been evident since mid-2018 has served to depress the apparent trend in retail sales.  In real terms, retail sales were flat in January, after a modest 0.2 percent decline in December. On a year-on-year basis, retail sales were up 1.8 percent in January in real terms.

Even after stripping out the misleading price effects, these are hardly robust numbers.  The widely-reported rise in Canadian households' debt burden is very likely crimping spending plans, especially for big ticket (and usually debt-financed) purchases such as vehicles.  With business investment and exports both exhibiting weakness, it will be difficult for the economy to gain much forward momentum in the near term.

StatsCan also reported consumer price data this morning.  Headline CPI rose 1.5 percent year-on-year in February, up from 1.4 percent in January. Like the retail sale data, CPI figures in recent months have been disproportionately affected by the remarkable fall in gasoline prices.  This now seems to be at an end: gas prices actually rose month-on-month in February for the first time since July 2018, though they remain lower on a year-to-year basis.  Since retail gas prices have continued to rise in recent weeks, it is reasonable to assume that the headline CPI figure will edge higher again in March.

Stripping out gasoline prices, the increase in CPI for February stood at 2.1 percent, unchanged from January.  Moreover, the average of the Bank of Canada's favoured core inflation indicators actually slipped to 1.8 percent in February from 1.9 percent in the previous month.

These numbers certainly support the consensus expectation that the Bank of Canada will be on the sidelines, policy-wise, for some months to come -- my old shop at TD Economics thinks there will be no change right through 2020.   There is however, one key piece of data that is, for now, telling a very different story.  Employment jumped 56,000 in February, its second straight strong monthly increase, and the unemployment rate remains close to multi-decade lows at 5.8 percent.

Employment is, of course, usually regarded as a lagging indicator of economic activity.  Even so, it is a little surprising that the apparent weakening in GDP growth that has been apparent since the third quarter of 2018 has not yet shown up at all in the jobs data. The next labour force data release is set for April 5.  After two successive strong numbers, it would be unsurprising if the numbers for March showed some pullback; and if the GDP, retail sales and other recent data are accurate, that pullback could be substantial.