A quiet week for economic data (particularly in Canada) left the focus on coronavirus/COVID-19 developments. Slower growth in the number of new cases supported risk appetite early in the week though a spike in infections reported on Thursday (albeit due to a change in methodology for detecting/counting new cases and not necessarily a higher rate of infection) stalled the market rally. Central bankers were vague in addressing the economic impact of the outbreak. In congressional testimony, Fed Chair Powell said it was too early to tell if the coronavirus would have a material impact but that it “could lead to disruptions in China that spill over to the rest of the global economy.” Governor Poloz, speaking in Australia, also called it “very early days” but said supply chains are being disrupted and the outbreak will cause “many things to be lower,” including travel and investment. We continue to think the outbreak’s spillover to Canada’s economy will be modest, though there remains some uncertainty about the duration of shutdowns in China and the associated impact on global supply chains.
Chair Powell said economic data will start to show the coronavirus’ impact fairly soon, though he likely wasn’t talking about next week’s US indicators which generally cover housing (starts and resales) in January. In Canada, activity data will be even more backward-looking with the release of manufacturing and retail sales for December. The manufacturing sector is expected to show a rebound in activity after November’s rail strike impacted some industries (primary metals in particular took a hit). Rail disruptions are in the news again with some operators shutting down service amid protests/blockades that have now lasted a week. November’s week-long strike contributed to a 4% decline in rail transportation GDP, which combined with spillover to other industries likely subtracted 0.1 percentage point or less from monthly growth. We could be looking at a similar hit to February’s GDP.
Canadian retail sales should benefit from Cyber Monday falling in December this year, though we don’t think a rebound in the month was enough to save what looked like another soft quarter for consumer spending. The latest inflation data will also be released, with headline CPI expected to hold steady at 2.2% while the BoC’s core measures might edge down slightly but shouldn’t stray far from December’s 2.1% average. The BoC has been clear that on-target inflation reflects the economy previously operating close to full capacity, so we don’t think a few more months of 2% core CPI should be viewed as a barrier to the BoC lowering rates.
Budget season also kicks off next week with British Columbia set to unveil fresh fiscal projections on Tuesday. Alberta’s budget is scheduled for the following week and Quebec’s in early March, while the federal government still hasn’t set a date for its budget. Governor Poloz discussed the mix of fiscal and monetary policy this week though his comments were more backward-looking, noting fiscal support during the oil price shock was equivalent to about 100 basis points of easing that the BoC didn’t have to undertake. Still, the mix of debt between households and government makes clear that the former has done more of the heavy lifting since the global recession, and this week’s consumer insolvency data showed some households are struggling with high debt loads. When discussing a potential “insurance” rate cut, Poloz once again said the central bank would have to weigh the potential financial stability costs associated with such a move—but stuck to his view that macroprudential policies are better suited to managing vulnerabilities.