Forward Guidance: Coronavirus to Overshadow Early‑2020 Data

Next week brings some of the first economic indicators for 2020, though that data is likely to be overshadowed by the growing human and economic impact of the coronavirus outbreak. Very early estimates have suggested China’s Q1 GDP growth could be reduced by at least 1 percentage point. (For reference, the country’s year-over-year growth in the second half of 2019 was 6%). Some of that will spill over into Canada via lower commodity prices—WTI oil prices, for instance, are down nearly US$7 per barrel over the last two weeks—while the transportation sector will see a more direct hit with some airlines cancelling flights to China. Global industrial supply chains could also be impacted the longer the clampdown on economic activity in China persists. Financial markets will continue to assess the damage—so far, North American equity indices are roughly 2-3% lower (declines in Asian markets like Hong Kong are closer to 10%) while bond markets have rallied substantially.

As far as data goes, the highlight in Canada will be January’s employment report—though there’s less riding on the labour force numbers after a decent rebound in December’s job count and a retracement of November’s jump in the unemployment rate. We’re forecasting a moderate 10,000 increase employment, which we expect will be the new norm this year (monthly gains averaged 25,000 in 2019) given widespread reports of job shortages and limited labour market slack outside oil-producing provinces. A more significant slowdown in hiring (which would take more than one month of jobs numbers to assess) would raise concerns that the Canadian economy’s H2/19 soft patch extended into 2020. Also out next week, December’s trade data should show a recovery in energy exports—following earlier pipeline shutdowns—that will modestly reduce Canada’s overall goods deficit. Both exports and imports should get a boost with rail shipments having picked up following labour disruptions in November. But it’s likely too early to see any positive effects of an easing in global trade tensions around the turn of the year. A speech from BoC Senior Deputy Governor Wilkins on “Central Banking in a slow-growth world” will also be closely watched—between the bank’s dovish shift in January and coronavirus concerns, market odds of a rate cut (or more than one) this year have increased substantially.

The US will get its own jobs and trade numbers, but it’s the January ISM surveys that we’ll be watching to see whether the US-China and USMCA trade deals can revive business sentiment—particularly in the manufacturing industry where December’s ISM hit a four-year low. Regional surveys aren’t encouraging, though shutdowns in the aircraft industry could be obscuring any broader improvement in manufacturers’ confidence. The ISM services index, meanwhile, rose to a four-month high in December and is expected to improve further. That would suggest the US economy’s resilience in Q4/19—outside the industrial sector—continued early this year.