Why Things Are Starting to Look Up for the Canadian Economy

Strong retail sales and underlying inflation suggest new signs of life

Written by Andy Blatchford, The Canadian Press

Fresh economic data released Friday showed sturdier-than-expected retail sales and underlying inflation, providing further evidence the economy has started to show some life. A new Statistics Canada report found that inflation remained cool last month at 1.3% as cheaper energy prices—compared to a year ago—continued to weigh down the annual rate.

But the core inflation rate, which omits some of the most volatile items such as gas pump prices, produced a robust reading of 2.1%. The central bank watches core inflation closely because it’s a better indicator of underlying price pressures.

A separate Statistics Canada report Friday showed that retail trade numbers rose 0.4% in February to $44.2 billion, which followed a healthy two percent gain in January. Analysts had expected the figure to land in negative territory.

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“I think the bottom line here is the Canadian consumer is still very much alive and well,” BMO chief economist Doug Porter said of the retail sales figures. “We’re seeing very strong numbers out of places like Ontario and B.C.—pretty much anywhere but the Prairies reported very strong retail sales activity.”

One retail sales number really jumped out at him: the 9.2% year-over-year increase in Ontario. He believes it was “way stronger” than anyone would have anticipated and may have been partly a result of more Canadians spending their cash at home, rather than absorbing the exchange rate hit of the low loonie across the border.

But despite the encouraging numbers, some forecasters are still expecting next week’s real gross domestic product figure—a measure of economic growth—for February to show a contraction after a few weak reports.

Looking at growth in the first quarter as a whole is showing more promise. BMO is projecting real GDP to rise about 3.25% over the three months of 2016, while National Bank is expecting a bump of three percent.

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“February’s increase in retail spending surprised consensus given that it comes on top of the prior month’s massive gains,” National Bank senior economist Krishen Rangasamy wrote in a research note to clients. “All told, Canada is on track to register a strong first quarter €¦ driven by consumption and exports.”

The February retail trade gains were seen in most sub sectors, with motor vehicles and parts dealers benefiting from the largest increase in dollar terms. Sales were also up for clothing and clothing accessories stores, building material and garden equipment, as well as sporting goods, hobby book and music stores.

The biggest contributor of downward pressure on the headline retail number was the value of sales at gas stations, which slid for the eighth consecutive month to reach their lowest level since August 2010.

For inflation, the March reading followed a 1.4% year-over-year increase in February and a two per cent rise in January. The agency’s latest consumer price index said its headline inflation rate remained below the Bank of Canada’s two percent target, largely due to a drop in prices for gasoline, natural gas and fuel oil compared to the year before. Prices were down 13.6% at the pump, 17.4% for natural gas and 25.8% for fuel oil.

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Those downward forces countered higher prices for shelter and food—particularly fresh vegetables and fresh fruit. Due in part to the lower Canadian dollar, vegetables prices were up 14.9% and fruit rose 11.3% compared to the year before. Inflation was lower in eight provinces in March compared to the previous month, leaving Alberta and British Columbia as the only ones that saw a higher rate.

The new numbers suggest to Porter that the risk adjustment the federal government added to its forecasts in last month’s budget may have been too cautious. Critics have said the Liberals deliberately lowered their fiscal outlook by including larger-than-usual risk adjustments of $6 billion per year in order to help the government beat expectations down the road.

“I would say the overall theme over the last month is that generally speaking there’s a little bit more certainty and there’s a little bit more positive vibes behind the Canadian economy this year than what was presented in the budget,” Porter said. “It now looks like it will do a little bit better than what was expected. So, that’s going to put a healthier glow on Ottawa’s finances through this year.”


Has your business seen an uptick in retail sales, or any other signs of life for the Canadian economy? Let us know by commenting below.

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