Near-term Canadian growth trends still constructive but risks of escalating trade tensions continue to dominate sentiment
Current domestic economic data – including the release of high profile net trade and employment reports in the week – will continue to be overshadowed by concerns about escalating US trade tensions. The latest being the Trump administration’s threat to impose across-the-board tariff hikes on Mexico in an attempt to force that country to do more to stem flow of illegal immigration. Of course, “targeting” foreign countries with import tariffs really means taxing domestic producers and consumers. The US industrial sector has borne much of tariff hikes to-date and has already been looking wobbly after the US imposed added tariffs on $US 200 billion worth of imports from China late last year. US manufacturing output has fallen in three of four months to-date in 2019 and sentiment in the sector has softened. That’s before the rate on that last (for now) round of tariffs on Chinese goods was boosted to 25% from 10%. The ‘new’ tariff threats on Mexico would impact a broader swath of products but, once again, the US industrial sector would likely end up paying a sizeable chunk of the cost. Industrial machinery imports alone account for ~20% of US imports from Mexico.
Anything that hurts the US industrial sector will have negative implications for Canada, given tight integration of cross-border industrial production chains. And the threat of new tariffs on Mexico highlights the limits to protection from trade deals like NAFTA (or the new USMCA) when dealing with the Trump administration. The latest threats may turn out to be just that, and we have seen trade tensions ebb and flow significantly before. But the unpredictability of US trade policy is just one added source of uncertainty for businesses. And one more reason for the Bank of Canada to stay firmly planted in a holding pattern in terms of any future interest rate moves, despite what still looks like an okay economic backdrop currently.
Next week’s economic data will be looked at to confirm the economy pulled out of the recent funk. Much of the soft 0.4% Q1 GDP growth rate reflected transitory disruptions to oil & gas production and bad weather. After dropping early in the first quarter we are looking for next week’s report on April trade data to show activity continued to recover. We are looking for the trade balance to improve on the back of higher oil prices and increased rail shipments that suggest the weather-related drag on transportation capacity in February continued to unwind. The other important domestic report on tap is the labour data. We would not be at all surprised to see a sizeable pullback at some point in the notoriously volatile employment growth numbers after a whopping 426k increase over the last year, but are penciling in a small 5k increase in May alongside a steady unemployment rate at 5.7%