ADVERTISEMENT

Just in Time for Canada Day: Economy Is Clearly on the Mend

Just in Time for Canada Day: Economy is Clearly on the Mend

(Bloomberg) -- After a dreadful performance last winter, Canada’s economy has sprung back to life.

A string of reports Friday showed the expansion picked up at the fastest pace since 2017 in April and March; business sentiment unexpectedly rose in May, and mortgage growth is accelerating. The data add to a long list of recent evidence -- including strong job gains and a recovery in exports -- showing the nation’s economy is emerging from its recent soft patch, and perhaps even gathering steam.

It’s a feel-good economic news story just in time for Canada’s national holiday on July 1. While there are still questions about whether the momentum can be maintained in the second half of this year in the face of a deteriorating global outlook, the turnaround so far is a relief.

Here’s a recap of where the Canadian economy stands halfway through 2019.

Growth

As recently as April, analysts were warning that Canada ran the risk of falling into a recession amid a perfect storm of negative factors -- falling oil prices, volatile financial markets, higher interest rates, cooling housing markets and global trade tensions. Instead, the slump has turned out to be largely the result of transitory weakness in the oil sector, with many of the headwinds reversing.

Just in Time for Canada Day: Economy Is Clearly on the Mend

After stalling at the end of last year and the start of 2019, the economy is now on track for annualized growth of above 2% in the second quarter with the gains in April and March.

Worries remain about trade tensions and their impact on Canada. Few economists believe Canada will be able to sustain above 2% growth into coming years, with the expansion weighted down by high household debt levels and sluggish productivity.

But for now, the worst has been averted.

Interest Rates

Whether the Bank of Canada will be forced to match -- at least in part -- future rate cuts by the Federal Reserve is one of the biggest questions for investors. Markets are still pricing in at least one quarter-point cut in Canada over the next 12 months, amid concern that trade tensions between the U.S. and China will slow the global economy. The Fed is expected to reduce rates by a full percentage points over that time, starting with a cut next month.

Diffusing expectations for lower borrowing costs in Canada is the fact that the policy rate in the country -- at 1.75% -- is more than 50 basis points below the Fed rate. The Canadian economy is also accelerating in the second quarter after a weak start to 2019, while growth is slowing in the U.S. after a strong start. And inflation dynamics seem to be stronger in Canada.

The improving economic data will ease pressure for the Bank of Canada to match. Expectations for a rate cut at the December meeting have dipped to 33%, based on trading in the swaps market. There is just a 3% chance of a move at the July 10 meeting.

Housing

The GDP data -- which showed a slight tick up in housing investment -- also reinforce the idea of a stabilizing housing market. While the gain wasn’t big, the sector has been on a sharp downward trajectory for much of the past year.

The improving housing picture has also been evident in realtor transaction data that’s been suggesting demand is returning into some depressed markets. Sales in Toronto increased 4.7% in May after gaining 11% the month before, while in Vancouver they jumped 24%.

Just in Time for Canada Day: Economy Is Clearly on the Mend

The better outlook is also reflected in the latest credit data showing a rebound in mortgage lending. Data released by the Bank of Canada Friday show growth in residential mortgage credit rising at a 3.5% clip in May, after falling to some of the lowest levels since the early 2000s last year.

Jobs

The labor market had been the lone bright spot for the Canadian economy during the six-month soft patch over the winter, and has continued its torrid pace into the spring. While the numbers for June won’t be out until next week, the country has already created 250,000 new jobs this year and is on pace for its second-best first-half employment gain over the past four decades.

To contact the reporters on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net;Erik Hertzberg in Ottawa at eschmitzhert@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net

©2019 Bloomberg L.P.