October 16, 2014


Positive signs for Canadian economy

Three data points bode well for future


The wild fluctuations in equities markets during the past few days, which left the S&P/TSX nearly 10 percent off their yearly highs by mid month, have created have considerable investor uncertainty. However if you look beyond major indexes, there three major recent data releases bode well for the Canadian economy.


The first was Statistics Canada’s labour force survey, which showed that 74,100 jobs were created during September. That pushed the country’s unemployment rate to its lowest level since 2008. As Benoit Durocher, a senior economist at Desjardins notes, the results, which include a drop of 55,600 in the number of self-employed posts, in favour of steadier full time jobs, shows improvement compared to previous results.


The strong jobs performance comes on top of equally positive job numbers in the United States, Canada’s top export market. Employers south of the border boosted payrolls by 248,000 posts, beating analysts’ estimates and pushing the unemployment rate there below 6.0 percent. True, the overall US employment picture remains distorted by the large number of unemployed who have stopped looking for work and are thus not counted in the official statistics. However the overall trend is in the right direction.


The world’s largest economy

The second piece of positive data, which was buried or overlooked by most newspapers and newscasts, was news that the International Monetary Fund has said that China has surpassed the United States as the world’s largest economy in purchasing power parity terms. PPP adjusts for the fact that many items, such as a Big Mac or a haircut cost less in China. True, in real exchange rate terms, China has a long way to go before it catches up with the United States, particularly on a per capita basis. However China’s rise has so far been accompanied by increased demand in emerging markets for Canadian raw materials exports and there is no reason to believe that that will stop anytime soon.


The last favourable development for Canada is a large drop in crude oil prices that accentuated considerably this month. There again there is more to the story than meets the eye. That’s because Canada is a major oil exporter and price reductions are indeed likely to hit producer provinces such as Alberta and Newfoundland. On the other hand, most of the rest of the country consists of oil users and price drops put extra cash into pretty much all of their pockets. Falling oil prices also bring down the value of the Canadian dollar, which makes it easier for goods and services exporters to hawk their wares aboard.


How these three developments will play out over the longer term is increasingly unclear at this point, because Stephen Poloz, the governor of the Bank of Canada told markets earlier this month that he will stop providing forward guidance. However so far the central bank has given no indication that it will stray from its near-zero interest rate policy.


The good news is that too should provide continued positive stimulus for economic growth going forward.









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