Economists wary of inflation numbers
ANALYSIS: Darker economy could lurk below recent data
OTTAWA — On the surface, Canada’s economy is displaying signs of returning — albeit in small steps — to some form of normalcy.
Inflation has been making a mild and slow comeback in Canada, warming up after a period of ultralow price gains that characterized much of the past year, and is now closing in on what policymakers consider a happy medium between sustainable growth and still-affordable costs for consumers.
But scratch that surface and you might find a dark undercoating.
What may soon re- emerge is a pattern of overall economic weakness, highlighted by a slow recovery from a recession in the first half of 2015 — mild as it was — along with a meagre pattern of job growth, limited business investment and stagnant retail sales.
Obviously, consumers are still spending and adding to their personal debt, but a lot of that borrowed money is going into the real estate market, mainly Toronto and Vancouver — not resources-depressed cities in Alberta and Saskatchewan.
These signs could also point to disappointing growth numbers for the last half of this year, as well — with some analysts warning the country’s gross domestic product data next week might even indicate another downturn by the end of this year.
The health of Canada’s economy is a major concern for federal Finance Minister Bill Morneau, who will meet in Ottawa with his provincial counterparts for the annual ministers summit. The gathering traditionally begins with a dinner on Sunday, more relaxed and cordial than the daylong meat- and- potatoes talks slated for Monday.
Usually, the focus of these talks is around federal-provincial funding formulas for pension schemes, and transfers fees to support socalled have-not provinces to help level the playing field for government programs, along with ongoing disputes over cross-provincial trade and a progress on creating a national securities regulator.
These issues will be touched on, but the economy could and should be top of the agenda.
“There’s really no sugar coating it — the 2016 outlook has taken a step back because of the latest plunge in resource prices. And, quite frankly, some disappointment in other economic indicators, even aside from the resource sector in recent months,” said Douglas Porter, chief economist at BMO Capital Markets.
“Of course, we’re looking for some stimulus out of Ottawa next year,” Porter said, referring to the new Liberal government pledge to spend $10 billion a year over the next few years to building needed infrastructure and pump up the economy. But neither Prime Minister Justin Trudeau nor Morneau, his finance minister, can carry the stimulus ball alone.
“Unfortunately, I think there are a lot of provinces that really don’t have much room to manoeuvre at this point and really do have to have to stick to the restraint program,” Porter said.
“But there might be an argument for them to be a little less restrictive than they were planning on in 2016. I still think there are so many problem areas at the provincial level that a lot of them can’t take their foot off the break.
“But maybe they could lighten up just a little bit, given the economic growth disappointment we’re looking at in Canada next year.”
That economic outlook could already have been foreshadowed.
On Friday, Statistics Canada said the annual rate of inflation rose to 1.4 per cent in November, up from one per cent the previous month, and edging closer to the Bank of Canada’s two-percent target — the prime focus of policymakers when determining the central bank’s rate level — now at 0.5 per cent and expected to stay there for most of 2016 or longer.
“Oil is still sinking l i ke a stone, but its largest impacts on the 12- month rate of inflation are starting to fade,” said Nick Exarhos, an economist at CIBC World Markets.
“Despite slightly firmer readings on headline inflation, the Bank of Canada will be eyeing the performance of the economy in determining its stance,” he said. “A sluggish 2016 growth profile will have them standing pat, and lagging behind the Fed in tightening policy by a year and a half.”
On Wednesday, we will see the second shoe drop in the form of gross domestic product numbers from Statistics Canada.
GDP contracted by 0.5 per cent in September, a weak handover from the third- quarter, which many analyst had forecast would continue the monthly recovery from the first two quarters of decline. Now, many economists are expected growth of just 0.3 to 0.4 per cent for October.