The Candyman cometh - Capital Economics
Canada Economics

The Candyman cometh

Canada Economics Weekly
Written by Stephen Brown
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Recent accusations from some that Governor Stephen ‘Candyman’ Poloz is the prime reason for households’ debt binge in the past decade are unlikely to sway the Bank of Canada’s decision next week. With the outlook slowly improving, we expect the Bank to keep policy unchanged.

Recent accusations from some that Governor Stephen ‘Candyman’ Poloz is the prime reason for households’ debt binge in the past decade are unlikely to sway the Bank of Canada’s decision next week. With the outlook slowly improving, we expect the Bank to keep policy unchanged. (See Bank of Canada Watch.)

Admittedly, there were some disappointing signs in the Bank’s latest Business Outlook Survey, with firms’ investment intentions slumping to a three-year low. But that does not seem to reflect a sudden deterioration in overall business sentiment, as hiring intentions rebounded strongly. Above all, the rise in the Future Sales Indicator supports our view that GDP growth will accelerate in the first half of 2020. (See Chart 1.) (See more here.)

Chart 1: Future Sales Indicator & GDP

Sources: Bank of Canada, Refinitiv

House price inflation set to accelerate

The data this week showed that home sales declined by 0.8% m/m in December, reflecting falls in both Toronto and Vancouver. National home sales have made little headway for the past three months, but that doesn’t seem to have hurt prospects for prices. In December the sales-to-new listing ratio rose to its highest in 15 years and, while the Teranet measure of house price inflation has yet to show much growth (see Chart 2), we suspect it is only a matter of time. With the 3m/3m annualised growth rate of the alternative MLS price index at 7% in December, annual house price inflation looks set to surpass 5% by the second quarter and will probably rise to near 7% by the third quarter.

Chart 2: Sales-to-New Listing Ratio and House Prices

Sources: CREA, Teranet, Refinitiv

Phase one deal a positive for Canada

Given China’s commitment to buy substantial volumes of agricultural and energy products from the US as part of the Phase One trade deal signed this week, there has been some speculation that smaller commodity exporters such as Canada might lose out. But even if China halted energy and agricultural imports from Canada completely and Canada failed to find buyers elsewhere, exports would fall by just 1%. The more important point is that, by reducing global uncertainty, most export sectors will benefit.

Put that in your pipeline and smoke it

The Supreme Court this week blocked British Columbia’s latest attempt to halt the construction of the Trans Mountain pipeline, by unanimously dismissing the provincial bill that sought the power to decide what products can flow through pipelines in the province. Meanwhile, TC Energy confirmed it will resume work on the Keystone XL pipeline as early as next month. Neither pipeline will be ready any time soon, but these developments support our view that we are close to a turning point for the energy sector. (See Canada Economics Outlook).

The week ahead

As well as the Bank’s latest policy meeting, there are several key data releases next week. We expect to see that manufacturing sales slumped in November, while retail sales rebounded strongly. We also expect both consumer price inflation and house price inflation to have edged up in December.


Data Preview – Teranet/National Bank House Prices (Dec.) 08.30 20th Jan.

Forecasts

Previous

Median

Capital Economics

House Prices %m/m(%y/y)

+0.2%(+1.4%)

+0.0%(+1.7%)

House price inflation to rise further

We estimate that the Teranet index will show that house price inflation rose to 1.7% in December.

House price inflation has continued to edge higher in recent months, rising from a low of 0.4% in July to 1.4% in November. We expect it accelerated a touch further in December. That would match the message from the MLS price index, which already showed an acceleration in house price inflation to 1.7% in December, from 1.6%. The gain should reflect higher house price inflation across most of the major cities.

From January, house price inflation should start accelerating at a more convincing pace. We doubt that it will reach anywhere near as high as the 15% implied by the recent surge in the sales-to-new listing ratio (see Chart 3), but in recent months m/m% gains have averaged 0.5% and, if that pace continued, house price inflation would reach 5% by April and 6.5% by June.

Chart 3: House Prices and Sales-to-New Listing Ratio

Source: Refinitiv, CREA


Data Preview – Manufacturing Sales (Nov.) 08.30 21st Jan.

Forecasts

Previous

Median

Capital Economics

Manufacturing Sales (%m/m)

-0.7%

-1.5%

Manufacturing sales slumped

The disruption caused by the CN Rail strike means that manufacturing sales probably fell for the third month running in November.

The 3.4% m/m slump in exports in November does not bode well for manufacturing sales. Although that drop partly reflected weak energy exports as a result of the partial closure of the Keystone pipeline, even after adjusting for the products that are not counted in the manufacturing data our estimates point to a drop in manufacturing sales of 1.5% m/m. (See Chart 4.) That’s partly as a result of weak external demand, but mainly due to the disruption caused by the CN Rail strike which weighed on exports and disrupted supply chains.

The better news is that, as the strike was resolved by the end of November, there is scope for a big rebound in manufacturing sales in December despite the fact that global business surveys still look consistent with weak demand growth. While we expect the manufacturing sector to continue to struggle in the first half of 2020, things should improve in the second half of the year as global GDP growth starts to rebound.

Chart 4: Mfg Exports (CE-Adj.) & Mfg Sales (% m/m)

Source: Refinitiv, Capital Economics

Data Preview – Consumer Prices (Dec.) 08.30 22nd Jan.

Forecasts

Previous

Median

Capital Economics

Consumer Prices (Jun)

-0.1%(+2.2%)

0.0%(+2.3%)

Core CPI Trim

(+2.2%)

(+2.2%)

A small rise in headline inflation

We estimate that headline inflation rose by 0.1%-point to 2.3% in December, while CPI-trim inflation was unchanged at 2.2%.

The likely rise in inflation mainly reflects higher energy inflation, which appears to have risen by almost 4%-points to 5.0% in December. That would add 0.2%-points to the headline rate. Airfare inflation probably also rose due to the shortage of planes in the peak travel season caused by the grounding of the Boeing 737 Max jets, but we suspect that these rises were partially offset by declines in inflation elsewhere. Our calculations suggest that mortgage interest costs inflation fell by another 0.5%-points, and base effects are likely to have weighed on inflation in several categories including clothing. Altogether, we suspect that headline inflation rose to 2.3%, from 2.2%.

In November, two of the Bank’s three core inflation measures edged up by 0.1%-point, which took an average of the three to the highest since 2010. As firms’ selling price expectations have fallen sharply in recent months, that probably marked the peak. (See Chart 5.) We think that the core inflation measures were unchanged in December and expect them to decline in January and again in February, taking an average of the three back down to 2%.

Chart 5: CFIB Selling Price Expectations & Core Inflation (%)

Source: Refinitiv, Capital Economics

Data Preview – Retail Sales (Nov.) 08.30 24th Jan.

Forecasts

Previous

Median

Capital Economics

Retail Sales (%m/m)

-1.2%

+0.8%

Core Retail Sales (%m/m)

-0.5%

+0.5%

Retail sales partially rebounded

We suspect that retail sales partially rebounded in November, thanks to rises in most categories.

The 1.2% m/m drop in retail sales in October seems at odds with the current level of consumer confidence. While not exactly high, its level at least suggests that annual retail sales growth should be positive, in contrast to the -0.6% rate recorded in October. (See Chart 6.) With the timelier new car sales data pointing to a rebound in auto sales in November and as building material sales are likely to have partially rebounded from October’s slump, we suspect that overall retail sales rose by 0.8% m/m. In volume terms sales growth was probably a bit weaker, given that a rise in gasoline prices also seems to have supported sales values in November.

Chart 6: Consumer Confidence & Retail Sales

Source: Refinitiv, Bloomberg


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Release/Indicator/Event

Time EST (GMT-5)

Previous*

Median*

CE Forecasts*

Mon 20th

Teranet/National Bank House Prices (Dec)

08.30

+0.2%(+1.4%)

0.0%(+1.7%)

Tue 21st

Manufacturing Sales (Nov)

08.30

-0.7%

-1.5%

Wed 22nd

Consumer Prices (Dec)

08.30

-0.1%(+2.2%)

0.0%(+2.3%)

Core CPI Median (Dec)

08.30

(+2.4%)

(+2.4%)

Core CPI Common (Dec)

08.30

(+1.9%)

(+1.9%)

Core CPI Trim (Dec)

08.30

(+2.2%)

(+2.2%)

New House Prices (Dec)

08.30

-0.1%(0.0%)

-0.1%(=-.1%)

Wholesale Sales (Nov)

08.30

-1.1%

-0.5%

Bank of Canada Policy Announcement

10.00

+1.75%

+1.75%

+1.75%

Thu 23rd

No Significant Data Released

08.30

Fri 24th

Retail Sales (Nov)

08.30

-1.2%

+0.8%

Core Retail Sales (Nov)

08.30

-0.5%

+0.5%

Selected future data releases and events

31st Jan

GDP by Industry (Nov)

08.30

Industrial Producer Prices (Dec)

08.30

Raw Material Prices (Dec)

08.30

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

%q/q ann. (%y/y) unless stated

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

2019

2020

2021

GDP

0.0

2.3

1.7

1.8

2.0

2.1

1.6

1.7

2.3

CPI Inflation

2.1

2.0

1.6

1.5

1.5

1.8

1.9

1.7

1.8

Unemployment Rate (%)

5.8

5.8

6.0

6.2

6.2

6.0

5.7

6.0

5.7

Overnight Rate, End Peri’d (%)

1.75

1.75

1.75

1.75

1.75

1.75

1.75

1.75

2.00

10 Yr GoC., End Period (%)

1.59

1.60

1.68

1.71

1.75

1.80

1.59

1.75

2.00

USD/CAD, End Period

0.77

0.75

0.77

0.78

0.79

0.80

0.77

0.79

0.82

Sources: Refinitiv, Capital Economics


Stephen Brown, Senior Canada Economist, +1 416 874 0514, stephen.brown@capitaleconomics.com