Growing trade tensions between the world’s two largest economies drew plenty of attention this week, and for good reason with the US and China tagging each other with higher tariffs. The Bank of Canada highlighted potential escalation of trade conflicts as a key economic risk, and in turn a risk to the stability of the financial system. But let’s not lose sight of the fact that Canada enjoyed a run of solid economic data though the first half of May. This week it was stronger home sales and manufacturing activity; last week it was record job growth and a surge in housing starts. We expect the trend will continue next week with March’s retail sales.
Recall that the retail sector has underperformed recently with sales volumes effectively flat-lining over the second half of last year. Yes, sales rose at their fastest pace in nine months in February, but that was a low hurdle to clear and a good chunk of the increase was price-related. We think March’s numbers will look better in both the headline and details. Earlier data showed motor vehicle sales rose for a third consecutive month, with recent easing in financial conditions likely helping to put a stop to the slowdown in auto purchases seen throughout 2018. Other retailers that have suffered under rising interest rates and a housing slowdown—think furniture and building material stores—also appear to have found a bottom and could continue to tick higher alongside most resale markets. As was the case in February, rising gasoline prices will flatter the retail sales numbers, but it’s overall sales volumes that count and are likely to post a decent increase.
A healthier consumer and housing backdrop are necessary conditions for Canadian GDP growth to pick up as 2019 progresses. Recent data are pointing in that direction—let’s hope the improving trend doesn’t continue to be overshadowed by trade conflicts.