The week ahead should be a reminder both of risks to the Canadian economic backdrop coming from international trade tensions – but also that trade concerns are not the only headwind for the economy. The tone of trade negotiations between the US and China is more optimistic than it was a couple of months ago, and a ‘phase 1’ deal to at least halt further tariff hikes seems more likely. But the Trump administration has, to put it mildly, been unpredictable. And tariffs to-date are still taking a toll on global trade flows and industrial production trends. Industrial data for October out of both China and the US reported over the last week was softer than expected, with weakness in the latter not fully explained by transitory disruptions from the GM autoworker strike in the month. The manufacturing sector has looked if anything even softer in Europe where Brexit uncertainty has added to broader international trade concerns.
The Canadian manufacturing sector has been comparatively (and, to us, surprisingly) resilient. Sales volumes are still up about 1 ½% year-to-date in 2019, hardly an inspiring pace of growth but also better than feared. We continue to expect external weakness to ultimately seep more forcefully into Canada, and expect September manufacturing data in the week ahead will be on the soft side. But the report should also serve as a reminder that not all Canadian growth headwinds come from international trade concerns. The US auto-sector strike in September and October also caused production disruptions in Canada. That impact might still reverse in the very near term with the strike ending later in October, but the disruption also comes just before the non-transitory shutdown of production at GM’s Oshawa plant. Beyond industry-specific growth headwinds, Canadian businesses continue to report widespread shortages of labour as a larger impediment to growth than foreign demand concerns. Labour supply has been less of an issue in the oil-producing western provinces where oil transportation infrastructure shortages have remained a (larger-than-expected) headwind for the oil & gas sector year-to-date. But that issue, like labour shortages in the rest of the country, will not just go away if trade tensions do end up easing.
To be sure, the much larger Canadian services-sector has remained broadly unfazed. Labour markets have been very strong. Employment is up over 350 thousand year-to-date, all in services jobs and with about 80% the full-time variety. ‘Real’ labour income has strengthened alongside rising wages but stable underlying inflation trends, which we expect remained firmly anchored around the Bank of Canada’s 2% inflation target in October. Yet retail sales growth has been modest with sale volumes up less than 1% year-to-date through August. We expect sales in September will remain on the soft side, reflecting an earlier-reported tick lower in unit auto sales. In part, softer retail spending trends are probably related to consumers spending more on housing rather than current consumption. Housing markets continued to heat up in Canada’s largest markets through October. But already-high debt-servicing costs and low household savings are also a constraint on household ability and willingness to spend. Again, those are issues that will not just disappear if the US and China make nice on trade. To be sure, an easing in international trade concerns would reduce the risk of a trade-related downturn in the economy. But, as we have noted before , it might not have as big of a positive impact on the ‘base-case’ economic outlook as might initially be expected.