A flood of economic data ahead of the holidays should put some focus back on the domestic Canadian economy over the next week – with the importance of near-term data flow perhaps more elevated than usual as economy-watchers (and markets) try to decide whether an eye-catching pop up in unemployment in November was just monthly data volatility or the beginnings of a new more worrying trend. We think it’s the former. The labour market data is just too volatile to read too much into one report. And much of the concern about the Canadian economy has been tied to the external growth backdrop, which has begun to look, at least tentatively, less worrying. To be sure, the holiday season is not exactly bringing a wave of togetherness. A Conservative majority outcome in the UK election the week past seems to all-but-assure Brexit will proceed as scheduled at the end of January, and impeachment proceedings in US Congress have pushed forward. But a reported “phase one” deal between the US and China to halt further tariff hikes for now, and roll back a portion of earlier tariff hikes is at least a step in the right direction. That deal sounds a little less ambitious than preliminary reports earlier this week suggested. By our count, the rollback of half the September 1st 15% tariff hike on ~$100 billion of US imports from China accounts for roughly 10% (about $7-8 billion) of the total increase in tariff costs to-date.

We look for upcoming economic data to continue to look a little better, on balance. The US industrial sector has shown further signs of stabilizing even with a sharp increase in tariffs over the last year still in place. Manufacturing hours worked popped higher in November after being depressed by the GM strike in October, and that bodes well for a better-looking, or at least less-bad, industrial production report in the month. That earlier strike had a knock-on impact on the Canadian auto sector as well (itself a good reminder of how integrated are cross-border industrial supply chains) and should temporarily weigh on Canadian October manufacturing sales. But we look for underlying trends to continue to muddle along at flat to slightly positive growth with a bounce-back in near-term auto production likely to come in Canada as well in November, albeit with the end of most production at the Oshawa GM plant still to come. We look for Canadian retail sales growth to tick higher in October. That should still leave broader consumer spending growth trends decent but uninspiring compared to strong household income growth (even in that ugly November employment report, wages were up 4.5% from a year ago.) But part of that is probably just because households are spending more on housing instead. Indeed, Monday’s home resale report should show further tightening in markets, at least in some of the larger metro areas like Toronto, alongside further stabilization/acceleration in home price growth.


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