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Canada GDP vs Labour Market Growth Trends Diverging? Again?

The spread of the coronavirus in China has continued to alarm markets abroad, although North American equity markets have largely bounced back after earlier jitters pushed investors to the side-lines. In part that’s because, aside from the go-forward risks of global supply chain disruptions from the illness and the obvious human cost, the current economic backdrop abroad continues to look a little better. The UK’s official exit from the European Union last week seems to have at least reduced near-term economic uncertainty in Europe with early signs of business sentiment stabilizing in the UK and the Euro area. The US industrial sector has also looked a little better with the US-China phase 1 deal at the least trimming the odds of another significant deterioration in the trading relationship between the two world powers until at least beyond the 2020 US elections. January industrial production numbers in the week ahead still could look soft with earlier announced aircraft production shutdowns kicking in, but the ISM manufacturing index unexpectedly jumped out of contractionary territory for the first time in 6 months in January. US Fed Chair Powell is likely to reiterate the broadly positive tone from the last Fed policy announcement in his semi-annual testimony to Congress next week.

From the Bank of Canada’s perspective, there is still uncertainty about the impact of the coronavirus outbreak on global growth but at this point we think that spill-overs to the Canadian economy will be relatively modest . The central bank will nonetheless be concerned about slower underlying growth in the economy late in 2019. Our forecast that the economy will continue to grow slowly in the first half of this year supports our view that the central bank will cut the overnight rate by 25 basis points in April. Still, the Canadian job market looks solid with the unemployment rate ticking lower to start 2020 and wage growth still running strong. The contradicting signals being sent by soft GDP growth and solid labour market numbers brings back memories of a year ago when economic growth was also slowing worryingly over the winter despite ostensibly strong employment growth. It’s still too soon to say which trend will dominate this year but stronger labour markets and what looks like a less worrying external growth backdrop argue that underlying economic growth trends are probably not as bad as the latest GDP tracking numbers imply. Our forecast is for just a 0.3% increase in real GDP in Q4/2019.

The week ahead will, unfortunately, provide little added clarity on those underlying growth trends in Canada with January housing starts and home resales the only significant economic reports on tap. Those are certainly important in their own right, but housing markets have also not been a source of growth concerns. Indeed, quite the opposite. The Bank of Canada has been more concerned that low interest rates are spurring a rapid increase in housing demand, along with another acceleration in debt growth in the already highly leveraged household sector. Early reports from local real-estate markets suggest that housing markets continued to broadly tighten in early 2020.

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