Retailers feel pinch amid slower growth

ECONOMY Consumers tipped to curtail spending

• Canada’s central bank appears to be stuck in the middle.

With retail sales wavering and the manufacturing sector still weak, inflation is going nowhere. Likewise for interest rates, as the economy adjusts to a slower and, arguably, more sustainable pace of growth on the heels of an ultrahot surge earlier this year.

For monetary policy planners, there is little to do now but wait and watch after a start- and- stop cycle of rate hikes.

“The Canadian economy is expected to cool in the latter part of 2017 and into 2018, (and) much of the slowing is expected to reflect more moderate consumer spending and a cooling — not collapsing — housing market,” says Craig Wright, senior vice- president and chief economist at RBC Economics Research.

“Increasingly, investment and exports are expected to drive economic growth — though both are being held back by uncertainty related to the reworking of NAFTA,” warns Wright. “As a result, activity will look relatively soft through the end of the year and into 2018.”

Already, retailers are feeling the economic pinch, with sales falling off in September, most notably in purchases of clothes and vehicles. Sales in the sector were up just 0.1 per cent during the month, a worse performance than the average 0.9- perc ent i ncrease e xpected by analysts. Overall, sales growth for the third quarter was up 0.5 per cent, down from 1.4 per cent in the previous three-month period.

While still struggling, Canada’s manufacturing sector managed a 0.5- percent increase in sales in September. But the cloud over talks to overhaul the North American Free Trade Agreement leaves a huge question mark for the industry and how it will fair in the coming months — and after some kind of deal is struck.

For now, however, inflation remains tame. Canada’s consumer price index, slipped to 1.4 per cent in October from 1.6 per cent the month earlier, hardly cause for concern over possibly overheating the economy, and still below the Bank of Canada’s mandated midpoint policy target of two per cent.

Governor Stephen Poloz and his council have twice this year, in July and September, raised the bank’s trendsetting lending rate by 25 basis points, taking it to the current level of one per cent.

Any consideration of continuing that upward rate trajectory appears to be on hold, as the larger-than-anticipated growth surge in the first half of 2017 begins to taper off.

The second half of the year should show a big climb down from economic growth in the first half. After all, the handover from the annualized pace of more than four per cent in the first half would be hard to beat in any economic cycle.

These moves will all be under the microscope ahead of the central bank’s next interest rate decision, scheduled for Dec. 6. However, there will not be a news conference following the onepage announcement and most forecasters do not expect a rate hike.

For that, the public will likely need to wait until Jan. 17 for the bank’s next rate decision, which will come with the BoC’s quarterly Monetary Policy Report, an outlook and analysis on the domestic and global economy, and followed by an Ottawa news confer- ence with Poloz and senior deputy governor Carolyn Wilkins.

Between those events, Poloz will also deliver a speech on Dec. 14 — topic yet to be announced — to the Canadian Club in Toronto. The central bank is also scheduled on Jan. 8 to release its closely watched Business Outlook Survey and Loan Officer Survey.

“I think that the end of the year is all about getting back to normal. Clearly the pace of growth we saw in H1 (the first half ) of this year was not sustainable,” says Brian DePratto, senior economist at TD Economics.

“The deceleration into Q3 looks to be significant, but it is also being impacted by oneoff shocks like auto retooling and hurricane impacts ... making the deceleration look worse than it would have otherwise.”

And that scenario may not be a bad one.

“That t hings are still healthy is perhaps best captured by the labour market, which has added 341,000 full-time jobs through October, with hours worked and wages starting to pick back up. Financial conditions are still accommodative, and key housing markets seems to have stabilized, at least for the time being,” says DePratto.

“In some ways it is likely to be a bit of a goldilocks- type situation — decent, above potential growth, ongoing income and labour market strength, and a cautious central bank all make for a pretty nice place to be.”

However, DePratto adds that NAFTA “is the elephant in the room.” He said: “A bad outcome cannot be ruled out, something that would clearly have negative implications, although the mechanics of a U. S. withdrawal — for instance — would suggest more of a 2019 story.”

THE END OF THE YEAR IS ALL ABOUT GETTING BACK TO NORMAL.