One thing we should be getting used to by now is the roller coaster of international trade headlines. As we head into the final stretch of the year, markets keep alternating between excitement and skepticism around a possible phase one deal between China and the U.S. – unfortunately for now with very little substance to make a confident prediction one way or the other.
At least central banks here in North America have provided a pocket of predictability. As was widely expected, the U.S. Federal Reserve lowered its target for the federal funds rate to 1.5% to 1.75% - its third rate cut since July. Other central banks have followed suit, helping ease financial conditions, reassuring investors and hopefully reaccelerating economic activity.
Domestically, the Bank of Canada maintained its target for the overnight rate at 1.75%, while pointing to trade conflicts and resulting uncertainty as a key source of risk that may trigger potential rate cuts down the road. Trade disruption has weighed on the BoC’s outlook for some time, and it again lowered its global growth projection, this time to 2.9% for 2019 amid slowing global business investment and manufacturing activity.
Taking a closer look at the domestic economy, Q2 GDP growth of 3.7% looked spectacular on the surface. However, some of the details are not quite as remarkable: regional imbalances persist, business investment has been weak for some time and aside from an unusual jump last quarter, exports continue to show few signs of life. The fact that decelerating imports kept the overall trade impact relatively muted does not instill a lot of comfort.
On the positive side, household spending has shown resilience, with strong employment and wage gains supporting consumption. In addition, we’ve seen some stabilization in the housing sector, in part supported by a downward trend in interest rates since the fall of 2018.
Nonetheless, economic activity has decelerated with growth of 0.0% and 0.1% for July and August 2019. Overall, expected growth of 1.5% has been penciled in for 2019, but it’s not something to get excited about. More remarkable is the long list of factors that may drive this estimate up or down.
While Canadian consumers remain resilient, one of the areas that we are keeping a close eye on is ongoing labour market strength; employment data for October disappointed with roughly 2,000 jobs lost. While one data point does not make a trend and wage growth continued to be strong, this bears monitoring over the coming months. Also worth watching is a recent spike up in interest rates, driving the cost of debt service and mortgages back up.
For business investment and net exports, the list gets longer. As interest rates in the U.S. have pulled back, Canadian rates have become relatively more competitive, attracting foreign flows, putting upward pressure on the Canadian dollar and posing a headwind for exporters.
Of course, uncertainty around energy regulation and global trade policy persists. And the BoC included a stressed trade scenario in its October Monetary Policy Report that indicates substantial downside risk to growth, commodity prices and the Canadian dollar.
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