There’s more to watch this week than just the Federal Budget
Even though there has been a lot of economic data-crunching and policy moves along the way, the federal government’s 2018-19 budget — to be tabled tomorrow by Finance Minister Bill Morneau — will still be the No. 1 focus of families, small businesses, manufacturers and exporters.
Regardless, there are always a few surprises — rarely game changers, more like window dressing — in Ottawa’s annual spending document. But will there be any counterweights to a weakening NAFTA trade bloc, or policies to discourage brain drain and investment moves to the United States?
“Protectionist trade sentiments in the United States are viewed as the top challenge to growth of the Canadian economy,” according to a recent survey by Chartered Professional Accountants of Canada. “Uncertainty in the Canadian economy comes next, followed by the state of the U.S. economy.”
As well, the majority of those surveyed by the CPA Canada believe the federal government should set a target date for returning to a balanced budget.
Given the economic uncertainties in the leadup to tomorrow’s budget, let’s stick to what already know:
Consumer prices cool
What goes up, can come down. In the case of Canada’s consumer price index — the main gauge of inflation relied upon by the Bank of Canada to set interest-rate levels — the January reading was definitely down, at 1.7 per cent, from the year-over-year reading of 1.9 per cent in December. For policymakers, the ideal inflation level is two per cent, the midway point of the central bank’s comfort zone between one and three per cent.
Statistics Canada reported Friday that the main price gains in January were for transportation, up 3.2 per cent; food items, rising 2.3 per cent; and shelter costs, which increased by 1.4 per cent.
“There’s still not a lot of evidence that inflation pressures are really getting out of hand in a way that would force the bank to hike more quickly than they’ve been planning to,” said Royal Bank of Canada senior economist Nathan Janzen.
What happened to the consumer spending spree at the end of last year? According to Statistics Canada, sales at retail outlets pulled back by 0.8 per cent in December after ringing up three straight monthly gains. By contrast, November sales were up a revised 0.3 per cent.
“Canadian growth looks to have ended 2017 on a downbeat note, with the softness in retail likely holding overall GDP flat in December,” said Douglas Porter, chief economist at BMO Capital Markets. The weaker sales data could limit fourth-quarter economic growth to less than two per cent.
“We don’t believe the December retail drop is a sign that consumers are about to head into retreat, but we do believe that spending growth will be much milder in 2018 than its blistering pace for all of last year,” Porter said, following Thursday’s report. Still, retail sales in the fourth quarter of 2017 rose 1.5 per cent. For all of last year, consumer purchases were up 6.7 per cent — the strongest annual reading since 1997.
Keeping pace with rates
He may be the new head of the U.S. Federal Reserve, but Jerome Powell appears set on following a similar path as that of his predecessor, Janet Yellen.
The Fed’s benchmark rate remains at a still-low range of 1.25 to 1.5 per cent. In its end-of-January policy meeting — led for the final time by Yellen — the central bank made no adjustments to its timeline on further hikes, according to minutes of the session released late last week.
For now, the rate path still leads to three increases this year, as it did in 2017. But that pace could quicken to four hikes as the Trump administration’s tax cuts for families and businesses kick in and infrastructure spending starts to flow out. The next Fed meeting is March 20-21.
Poloz on different course
At the Bank of Canada, meanwhile, policymakers are not rushing quickly toward additional rate increases this year. Governor Stephen Poloz and his monetary team lifted their key lending level by a quarter point in January to 1.25 per cent, following quarter-point increases in July and September.
“More important will be what occurs over the coming months as the impacts of mortgage underwriting changes (by the federal government) and three policy rate hikes continue to work their way through the economy, while external risks remain,” noted Brian DePratto, senior economist at TD Economics.
“A wait-and-see approach to confirm that the Canadian economy remains on solid footing still favours July as the likely target for the next rate hike.”
Still to come from BoC
The central bank’s next rate decision on March 7 will be a stand-alone event, with the release of only a statement. But it will be followed one day later with a Vancouver speech on economic progress by BoC deputy governor Timothy Lane.
On March 13, governor Poloz will address Queen’s University in Kingston, Ont., on the issue of “Today’s Labour Market and the Future of Work.” As well, senior deputy governor Carolyn Wilkins will speak at the Rotman School of Management in Toronto on March 22 on a yet-to-be announced topic.
But before all that …
The final economic numbers for 2017 will be released Friday by Statistics Canada — and they may not be encouraging.
The fourth quarter is expected to provide “yet more evidence that the Canadian economy has come back down to reality,” says Porter. “As a result of the setbacks in each of retail, wholesale and manufacturing activity in December, we suspect (this) week’s monthly GDP report will read flat. Thanks to a decent November, growth for all of Q4 will be close to two per cent — annualized — but still below the BoC’s latest estimate of 2.5 per cent for the quarter.”
“The main point is that the wonderful spell of upside surprises for the broader Canadian economy pretty much ended in mid-2017.”
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