Bankrate

 

August economics

 

Title: Canadian economy keeps muddling along

Sub-title: However there is some good news for consumers as interest rates will likely remain low for some time.

 

The Canadian economy continued to muddle along during recent weeks, with disappointing employment, trade and growth data mixed in with more optimistic signs from south of the border. That said, the uneven results mean that the Bank of Canada will continue to keep interest rates low for quite some time.

 

The jobs numbers were particularly gruesome, with Canada's economy shedding 30,400 posts in July, which according to the Statistics Canada’s Labor Force Survey, is the largest drop since October 2011. The unemployment rate ticked up to 7.3 per cent due in large part to a drop in part-time employment. However those numbers need to viewed with caution says one expert.

 

“Canada has added an average of 20,000 new jobs per month over the past six months,” Leslie Preston, an economist with TD Economics reminds us. “Month-to-month employment tallies in Canada are notoriously volatile, so July’s job losses need to be viewed in the context of the past trend.” Canada’s trade numbers were also disappointing. In July the country registered a third consecutive month in which imports exceeded exports.

The grim news follows the release of weak May gross domestic production figures, which showed that the Canadian economy grew by just 0.1 percent that month. According to Avery Shenfeld, an economist at CIBC, that puts the country on track to grow by less than 2.0 percent during the quarter. “We had been looking for a much stronger contribution,” wrote Shenfeld, in a note to the bank’s clients. “As a result, we are revising our Q2 forecast (downwards).”

Tied in to world developments

As usual, Canada’s economy, which relies heavily on trade, particularly resource exports, continued to be heavily tied in to developments on the world stage. In a sense, that is good news, because there have been positive economic signs in America, which buys most of our export goods.

 

Part of the momentum stems from increased activity south of the border. US job creation surprised on the upside during July, adding 163,000 posts, 50,000 more than analysts expected. “The job growth acceleration is lessening fears of a sharp downturn in the US economy,” notes Mathieu D’Anjou, an economist with Desjardins Group. “As a result pressure has lifted slightly for additional action from the Federal Reserve as of September.”

 

The US housing sector, which has been through terrible times in recent years, has been doing well too lately, leading some analysts to speculate that it may have bottomed. As if that wasn’t enough, US stock markets, which are often a leading economic indicator, have been on a relatively strong uptrend lately.

 

That said, those positive developments have few echoes elsewhere in the world. China remains mired in a slowdown and Europe is in a recession. That sluggishness is a big reason that the International Energy Agency recently revised downwards its forecast of world oil demand for next year. Recent developments in Europe have been particularly troubling, with both Spain and Italy both being forced to pay unsustainably high interest rates on their borrowings, a trend which, if continued could make them reliant on bailouts in order to stay afloat.

Bank of Canada’s kept interest rates low

The result of all of the uncertainty in Europe, coupled with continued concern regarding the US budgetary position, is that the Bank of Canada, which has wanted to tighten up the money supply for several months now, has been forced to keep interest rates low. At its last policy announcement the Bank said that it expects growth to continue at a modest pace and that it would maintain its policy (overnight) rate at 1 percent, where many analysts believe that it will remain for the time being.

 

This easy money environment continues to bode well for durable goods consumers and residential real estate. New home construction for example remained exceedingly strong throughout July.

 

The question though is how long this will all continue. According to Preston the Canadian economy will “continue to chug along at a

modest 2% pace,” and the Bank of Canada will eventually move towards, modest interest rate increases, at the earliest by next spring.

 

 

Peter@peterdiekmeyer.com

 

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