Forward Guidance: Geopolitical Uncertainty Matters – But Economic Data Still Looks a Little Better

Fundamental analysis of Forex market

A week that started off with worries about the stability of global oil supply in the wake of last weekend’s attack on a major oil production facility in Saudi Arabia ended up looking, if anything, a little better in terms of the current growth backdrop for North America. The events are a clear reminder that geopolitical events/tensions have global economic implications as well. Still, the bulk of an initial spike in global oil price benchmarks on Monday has reversed on reports that the disruption to oil production will be shorter than initially feared. Of course, the risks of higher global oil prices are not all one-sided for all countries. There is room for debate about whether Canada would benefit, on net, from higher oil prices this time around. It is questionable whether a moderate increase in oil prices would have oil companies rushing to invest in western Canada given persistent transportation constraints. And higher oil prices would increase the cost of gasoline for households. But as a net exporter of oil, it is clear that higher prices would lift the sector’s contribution to income flowing into the economy, at least in the near-term.

And, beyond hypothetical risks, improving economic growth numbers out of both the US and Canada are leaving the underlying economic growth backdrop looking a little better. This week, stronger housing market data out of the US confirmed that softness in the industrial sector year-to-date has yet to spill over significantly into slower household spending growth – and recall consumer spending and residential investment account for more than 70% of the US economy. But the manufacturing sector also looks like it may have regained a pulse, albeit with more US tariffs on imports from China still to come. Manufacturing production posted its third increase in four months in August. Signs of green shoots in the industrial sector were probably at least part of the reason that divisions among US Fed policymakers about the best approach to interest rate policy have become more pronounced. We expect next week’s economic reports will show consumer confidence and spending both remaining relatively resilient, while the advance international trade report will give clues on how trade flows are adapting to US-China trade tensions/tariffs.

In Canada, household spending growth has also been looking better, even with the persistence of soft retail spending numbers through July. Overall consumer spending growth still picked up a bit in H1/19, on average, and spending on residential investment is on track to post a second consecutive sizeable increase in Q3 with home resales now having increased for 6 straight months as of August. The next week is a quiet one in terms of economic data releases, but monthly labour market earnings data for July on Thursday should be watched for signs that higher wages already reported in the closely-watched monthly LFS employment report are confirmed in other data sources.

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