Inflation dips to low end of central-bank comfort zone
Retail sales bounce back in February
OTTAWA — Canada’s economy appears to have weathered more than a few storms fairly well recently.
Cobble together recent data — and stretch the numbers over the next quarters — and the outlook is moderately optimistic.
Inflation, for instance, has cooled slightly but not enough to greatly concern policy-makers, who remain optimistic that prices will pick up again as the economy does likewise.
And a rebound in retail sales — curtailed by severe winter conditions — indicates consumers haven’t tired of fuelling much of that growth.
On Friday, Statistics Canada said the annual rate of inflation eased in February, barely clinging to the low end of the Bank of Canada’s comfort zone, as prices for gasoline and clothing declined from a year earlier, while food and shelter costs increased at slightly faster rates.
Consumer prices rose by an annualized rate of 1.1 per cent last month, slightly higher than economists’ forecasts and down from an annual pace of 1.5 per cent in January.
The Bank of Canada would like to see price gains closer to its two-per-cent target, the midway point of policy-maker’s one-per-cent to threeper-cent preferred range and the primary focus of monetary policy that, in turn, determines the timing and direction of the bank’s key lending rate — currently sitting at one per cent, unchanged in 3-1/2 years.
Many economists had speculated the central bank, which dropped its pro-ratehike stance in October, might instead cut its trendsetting rate if low inflation and sluggish economic growth persisted.
“The basic story of moderate but improving growth and continued inflation is a reasonable expectation (for the economy),” said Craig Alexander, chief economist at TD Economics.
“Next month, we’re probably going to find that inflation bounces back a little bit higher,” he said.
“As a result, I don’t think that will shift the Bank of Canada thinking that the drop in inflation is behind us and inflation is gradually going to move back up toward the two-per-cent target.”
Meanwhile, also on Friday, the federal agency reported a rebound in retail sales, notching a better-than-expected gain of 1.3 per cent in January. That nearly reversed the 1.8-per-cent drop in the previous month when severe storms kept many consumers away from stores.
“The strengthening in retail sales in January followed earlier-reported increases in the volume of wholesale trade and manufacturing sales in the month,” noted RBC economist Nathan Janzen.
“In all, the monthly data released to date suggest that overall January 2014 gross domestic product likely retraced most, if not all, of the 0.5-per-cent weather-related drop recorded in December,” he said.
“A further easing in weather-related December weakness bodes well for activity to continue to improve going forward.”
Canada’s gross domestic product grew two per cent in 2013, and many economists expect expansion of around 2.3 per cent this year. But the first quarter of 2014 will likely produce annualized growth of between 1.2 per cent and 1.4 per cent, compared with 2.9 per cent in the last three months of 2013.
“The retail data tells us that consumers are still out there spending, and the weakness that we’re seeing in the first quarter is not going to persist,” Alexander said.
“We’ll find in the second quarter that we are going to get an improvement in growth. We are going to see a rotation in the drivers of growth, more toward exports and investment. But I think it’s taking time, and it’s going to happen as the U.S. economy improves.
“I think what we’re probably going to find is that consumers keep on spending but they don’t leverage themselves up as much they way have been, and that’s consistent with the recent debt data that we’ve been getting.”