The good times lasted less than a week.
On March 31, Statistics Canada reported that gross domestic product expanded 0.6% in January from the previous month, an unusually large gain that caused some to declare that Canada was off to a “roaring start” in 2016. Five days later, on April 5, StatsCan released trade data for February. Exporters followed a record January with a big 5.4% drop in sales the following month, as demand from the United States plunged. “Canadian trade data spoiled the party,” said Nick Exarhos, an economist at Canadian Imperial Bank of Commerce.
GDP was so strong to start the year that the Bank of Canada likely will have to raise its growth estimates for the first quarter from the current 1% to as much as 3%. The federal government’s plan to run deficits of $29 billion in each of the next two years also will boost short-term growth forecasts. But the longer term outlook never really changed. Canada’s outlook is contingent on a sustained run of stronger exports and a revival in business investment. The February trade figures were a reminder that the first contingency is largely out of Canada’s control. Exports will be prone to wobbles, as global demand is less than robust. “The good news is that the recovery continues; we have growth; we are not in a crisis,” Christine Lagarde, managing director of the International Monetary Fund, said April 5 in a speech in Frankfurt. “The not-so-good news is that the recovery remains too slow, too fragile, and risks to its durability are increasing.”
There also seems little the central bank can do about the second contingency, business investment. The benchmark interest rate is within a quarter point of its record low, yet overall executives remain hesitant to spend. “Investment and employment intentions have increased, but remain modest,” the Bank of Canada said in its latest quarterly Business Outlook Survey, released April 1. The central bank found that 39% of respondents said they planned to increase investment over the next 12 months, while 32% said they expected little change from current levels and 30% predicted a decline. That’s a better mix than the fourth quarter, but is poor compared with 2013. Imports of industrial machinery and equipment, a proxy for investment, was little changed in February from a year earlier, according to StatsCan’s trade report.
After the GDP report, Mark Chandler, an economist at RBC Dominion Securities, said the stronger data gave the Bank of Canada “breathing room.” To be sure, there is little reason to expect a shift in policy after the central bank concludes its latest deliberations next week. On the whole, conditions are better than they were when the Bank of Canada left its benchmark interest rate unchanged on March 9. But it’s unsettling how quickly this post-crisis economy can suck the life out of a party. Higher interest rates remain a distant bell.
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