Data deluge will help set growth expectations – but the Q1 Business Outlook Survey to take centre stage
A heavy flow of economic releases will help set the tone for near-term growth expectations in Canada. But the Bank of Canada’s abrupt shift to the side-lines in terms of the interest rate hiking cycle in recent months probably had as much to do with perceived global trade risks and benign inflation trends as domestic growth concerns. On the former, our read is that Canadian businesses have been relatively successful to date at adapting to tariffs levied bilaterally between the U.S. and Canada. And China’s effective ban on Canadian canola imports will probably be less disruptive than might be initially feared. International trade numbers have looked okay if unspectacular – non-energy export volumes were up ~3% from a year ago over the three months ending in January. We look for a smaller February trade deficit to be reported with higher oil prices boosting exports and a big increase in imports of aircraft in January not expected to be repeated.
The larger concern is still the extent to which trade uncertainty is weighing on business confidence and investment. In that context, economic data will be overshadowed by the release of the Bank of Canada’s Q1 Business Outlook Survey on Monday. Overall business sentiment has held up relatively well in recent quarters. And comments from Governor Poloz on April 1st (presumably after interviews for the BOS had already been completed) hinted that near-term M&E investment intentions are still constructive. There is nonetheless probably room for broader business sentiment to soften relative to earlier levels. Inflation expectations are likely to remain benign – and that should be confirmed by CPI data out on Wednesday. Headline inflation probably ticked higher on an energy price increase in March, but we expect ‘core’ measures of underlying trends to hold firmly at slightly below the BoC’s 2% inflation target. In other words, not so low as to argue lower interest rates are needed but also not showing any risk of jumping higher to put pressure on the central bank to hike further.
In other data reports, an earlier-reported tick up in auto sales suggests that bad weather was less of a restraining factor on Canadian consumer purchases in February than on housing investment (recall, home resales and starts fell sharply in February.) But underlying household spending trends still appear to be slowing. And we look for manufacturing sales to edge down 0.1% after a 1.0% increase in January. All-in-all, the data should still point to slow GDP growth around 1% in Q1 – but with much of the softness still attributable to oil production cuts and bad weather effects that should prove transitory.
And the US economy still looks like it’s doing okay. The industrial sector is still growing and an expected jump in retail sales in March should further ease concerns about the underlying pace of US household spending growth. Given that backdrop, there is still room for Canada’s non-energy exports to continue to grind higher going forward.