August 31, 2018 Table of Contents What we’ll be watching ............. p. 3 Calendar of upcoming releases .... p. 4 Annex – Economic tables ............ A1 Next week’s BoC policy announcement We expect the Bank of Canada to leave its overnight rate unchanged next week. As BoC Governor Stephen Poloz pointed out in the past, the big picture is what matters for policy decisions. On the inflation front, though the headline CPI surprised on the upside in July with a 12-month print of 3.0%, the jump was due essentially to an atypical 15% m/m surge in intercity transportation costs. The inflation measures used by the BoC to filter out such noise suggest annual inflation was a tamer 2.0% and showed no sign of acceleration. Regarding GDP, where the Canadian economy grew 2.9% in Q2, a tick higher than the BoC’s projection, it is expected to slow down in Q3. Where NAFTA is concerned, Poloz has stated in the past that the BoC would need to see how business investments reacted to a positive resolution of current negotiations. All in all, the big picture does not suggest the need for the BoC to depart from its gradual data- dependent approach to policy normalization. Waiting until October for its next policy rate hike would be more consistent with this game plan. Week in review CANADA: Canada’s expanded at an annualized pace of 2.9% in 2018Q2, short of the 3.1% expected by consensus but just above the BoC’s estimate of 2.8%. The prior quarter’s growth was revised up marginally to 1.4%. Trade contributed to growth for the first time in a year thanks to surging exports. Domestic demand was well supported as well, owing to a healthy contribution from consumption spending and gains for residential investment, government expenditures, and business investment. Households saw real disposable income grow 1.2% annualized in Q2 and their saving rate slip half a percentage point to 3.4%. Industry data showed GDP was flat in June. In Q2, output expanded 5.2% annualized in the goods- producing sector and 2.7% annualized in the services- producing sector, double the prior quarter’s pace. After a slow start to the year, Canada’s economy took off abruptly in Q2 as surging exports complemented the ongoing resilience of domestic demand. Consumption spending was boosted by a vigorous labour market (which lifted real disposable income) together with a drop in the saving rate. A solid increase in nominal GDP (+5.1 annualized in the quarter) should help replenish government coffers. Also encouraging is the continued recovery of business investment, as is the drag from inventories, which means the need to restock should stimulate production in future. However, though the Q2 GDP report was positive all in all, it is unlikely to persuade the central bank to hasten monetary policy tightening. Canada’s was in the red again in 2018Q2. Though the external deficit narrowed to C$15.9 billion from an improvement in the goods trade balance, it remained hefty at about 3% of GDP. What’s more, there were net outflows of FDI in the quarter as Canadian firms increased direct investment abroad a lot more than foreign firms upped their investment in Canada. -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 2014 2015 2016 2017 2018 2018Q2 2018Q1 GDP 2.9% 1.4% Consumption 1.5% 0.6% Business investm. 0.2% 1.3% Nonprofit sector 0.1% 0.0% Residential investm. 0.1% -0.8% Government 0.2% 0.7% Domestic Demand 2.1% 1.8% Exports 3.7% 0.7% Imports -2.1% -1.4% Trade 1.6% -0.6% Inventories -0.4% 0.0% Stat.discrepancy -0.3% 0.4% Canada: Growth accelerated sharply in the second quarter NBF Economics and Strategy (data via Statistics Canada) q/q % chg. saar Nominal GDP Real GDP Real and Nominal GDP Contributions to real GDP Q2 -6 -4 -2 0 2 4 6 8 1985 1990 1995 2000 2005 2010 2015 -60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 2016 2017 2018 Current account FX reserves FDI net flows Portfolio/other net flows Stat.discrepancy Canada: Record unobserved capital flows NBF Economics and Strategy (data via Statistics Canada) Sources of financing for external deficit C$ bn Financing needs Sources of financing Stat. discrepancy (net errors and omissions) C$ bn Q2 Reliance on short- term capital inflows extends to 2018 … … although the extent is unclear given record unobserved flows 2018 Q2
Transcript
August 31, 2018
Table of Contents What we’ll be watching ............. p. 3 Calendar of upcoming releases .... p. 4 Annex – Economic tables ............ A1
Next week’s BoC policy announcement
We expect the Bank of Canada to leave its overnight rate unchanged next week. As BoC Governor Stephen Poloz pointed out in the past, the big picture is what matters for policy decisions. On the inflation front, though the headline CPI surprised on the upside in July with a 12-month print of 3.0%, the jump was due essentially to an atypical 15% m/m surge in intercity transportation costs. The inflation measures used by the BoC to filter out such noise suggest annual inflation was a tamer 2.0% and showed no sign of acceleration. Regarding GDP, where the Canadian economy grew 2.9% in Q2, a tick higher than the BoC’s projection, it is expected to slow down in Q3. Where NAFTA is concerned, Poloz has stated in the past that the BoC would need to see how business investments reacted to a positive resolution of current negotiations. All in all, the big picture does not suggest the need for the BoC to depart from its gradual data-dependent approach to policy normalization. Waiting until October for its next policy rate hike would be more consistent with this game plan.
Week in review CANADA: Canada’s expanded at an annualized pace of 2.9% in 2018Q2, short of the 3.1% expected by consensus but just above the BoC’s estimate of 2.8%. The prior quarter’s growth was revised up marginally to 1.4%. Trade contributed to growth for the first time in a year thanks to surging exports. Domestic demand was well supported as well, owing to a healthy contribution from consumption spending and gains for residential investment, government expenditures, and business investment. Households saw real disposable income grow 1.2% annualized in Q2 and their saving rate slip half a percentage point to 3.4%. Industry data showed GDP was flat in June. In Q2, output expanded 5.2% annualized in the goods-producing sector and 2.7% annualized in the services-producing sector, double the prior quarter’s pace. After a slow start to the year, Canada’s economy took off abruptly in Q2 as surging exports complemented the ongoing resilience of domestic demand. Consumption spending was boosted by a
vigorous labour market (which lifted real disposable income) together with a drop in the saving rate. A solid increase in nominal GDP (+5.1 annualized in the quarter) should help replenish government coffers. Also encouraging is the continued recovery of business investment, as is the drag from inventories, which means the need to restock should stimulate production in future. However, though the Q2 GDP report was positive all in all, it is unlikely to persuade the central bank to hasten monetary policy tightening.
Canada’s was in the red again in 2018Q2. Though the external deficit narrowed to C$15.9 billion from an improvement in the goods trade balance, it remained hefty at about 3% of GDP. What’s more, there were net outflows of FDI in the quarter as Canadian firms increased direct investment abroad a lot more than foreign firms upped their investment in Canada.
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
2014 2015 2016 2017 2018
2018Q2 2018Q1
GDP 2.9% 1.4%
Consumption 1.5% 0.6%
Business investm. 0.2% 1.3%
Nonprofit sector 0.1% 0.0%
Residential investm. 0.1% -0.8%
Government 0.2% 0.7%
Domestic Demand 2.1% 1.8%
Exports 3.7% 0.7%
Imports -2.1% -1.4%
Trade 1.6% -0.6%
Inventories -0.4% 0.0%
Stat.discrepancy -0.3% 0.4%
Canada: Growth accelerated sharply in the second quarter
NBF Economics and Strategy (data via Statistics Canada)
q/q % chg. saar
Nominal GDP
Real GDP
Real and Nominal GDP Contributions to real GDP
Q2
-6
-4
-2
0
2
4
6
8
1985 1990 1995 2000 2005 2010 2015-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
2016 2017 2018
Current account FX reservesFDI net flowsPortfolio/other net flowsStat.discrepancy
Canada: Record unobserved capital flows
NBF Economics and Strategy (data via Statistics Canada)
Sources of financing for external deficit
C$ bn
Financing
needsS
ources of financing
Stat. discrepancy (net errors and omissions)
C$ bn
Q2
Reliance on short-term capital inflows extends to 2018 …
… although the extent is unclear given record unobserved flows
2018Q2
Weekly Economic Watch
2
The outflows were financed by short-term capital from portfolio inflows, that is, foreigners buying Canadian financial securities. The problem with short-term capital inflows is that they are unpredictable, a factor that renders the Canadian dollar more vulnerable to swings in foreign investor sentiment. Moreover, this reliance on short-term capital could be worse than what has been suggested by Statistics Canada given the massive “statistical discrepancy” that measures unobserved flows.
The (SEPH) showed that 32.1K paid jobs were created in June and 192K since the start of the year for a monthly average of +32K. In sharp contrast, according to the Labour Force Survey (LFS), paid employment declined 17K over the same six-month period for a monthly average of -3K. So which of the two reflects the Canadian labour market more accurately: the SEPH, which surveys establishments, or the LFS, which surveys households? We tend to lean towards the SEPH in part because direct responses from employers are arguably more reliable. Also, the job gains reported by the SEPH are more in sync with the observed decline in the number of regular employment insurance beneficiaries.
UNITED STATES: The Bureau of Economic Analysis (BEA) pegged its second estimate of growth at 4.2% annualized. This overshot consensus, which expected a downgrade to 4.0%. The BEA indicated that upgrades to trade more than offset slight downgrades to consumption spending. Final sales (i.e., GDP excluding inventories) grew 5.1% annualized in Q2, their highest rate since 2006Q1. With the Q2 upgrade, U.S. output ended up growing 2.7% annualized in the first half of 2018, matching the pace set in the second half of 2017.
Nominal increased 0.3% in July. The wage/salary component rose 0.4% while disposable income grew 0.3%. Nominal advanced a decent 0.4% (as it did in June). Adjusted for inflation, both disposable income and spending grew 0.2%. The edged down a tick to 6.7%.
Still in July, the headline climbed 0.1% m/m and 2.3% y/y (up a tick from June). The core PCE measure advanced 0.2% m/m and 2.0% y/y.
The jumped 5.5 points in August to 133.4. Both the present situation and expectations components improved over the month, recording gains of 6.1 and 5.2 points respectively.
Home prices rose 6.2% y/y in June according to the , which
measures average home prices in major metropolitan areas across the nation. The 20-city index rose 0.11% m/m (SA), leaving prices 6.31% higher than 12 months ago.
WORLD: The was a bit softer than expectations in August. The HICP rate rose 2.0% and core inflation grew 1.0% y/y.
China`s official (CFLP manufacturing PMI) which was expected to edge down in August came in better than expected, up one tick to 51.3. The non-manufacturing PMI rose two ticks to 54.2.
In Japan, were better than expected in July, growing 1.5% y/y. July fell 0.1%, disappointing forecasters that were looking for a small rebound after last months 1.8% decline. August accelerated to 1.2% y/y, from 0.9% in the previous month. Excluding fresh food and energy Tokyo prices were up 0.6% y/y.
Kyle Dahms et al.
Weekly Economic Watch What We’ll Be Watching
3
In Canada, we expect the Bank of Canada to
leave the overnight rate unchanged on Wednesday. On Thursday, Senior Deputy Governor Carolyn Wilkins will have an opportunity to explain the Bank`s latest decision. See Next week BOC policy announcement on page 1. August’s will also attract
attention on Friday. Despite a large increase in July, total employment is only up 37K in the first seven months of the year. Indeed, the LFS paints a rather morose picture of the Canadian labour market so far in the year in comparison to the more upbeat SEPH, a survey of establishments. The latter is showing a 190K gain for paid jobs in the 6 months to June, a number that appears more in line with the strength of latest economic data. That said, it would not be surprising to see LFS employment take a breather in August following two strong months. This is in line with our expectation of slower GDP growth in the third quarter. All in all, we suspect LFS employment may have been no better than flat in August. If that scenario unfolds, the
could rise one tick to 5.9%. We’ll also get data on July’s . Although energy exports may have
profited from higher prices in the month, we still expect the trade deficit to expand to C$2.0 billion. After registering outsized gains in the Q2, export volumes could struggle in July.
In the U.S, the important piece of news will be
for August. Jobless claims remained near a 50-year low in the month, pointing to a very low rate of layoffs. Still, hiring may have been limited by the shrinking number of qualified workers available. Taking all these elements into consideration, we
anticipate a +175K print. Meanwhile the unemployment rate may remain at 3.9% if, as we believe, the shows tepid employment gains. In other news, the
could have decreased slightly in August if Markit’s manufacturing PMI is any guide.
Elsewhere in the world, will
release manufacturing purchasing managers indices for August for a range of emerging economies including Brazil, Russia, India and China.
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Weekly Economic Watch
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