Forward Guidance: Canada GDP Data to Highlight Resilience Through Second Wave

Fundamental analysis of Forex market

Next week’s Canadian GDP report is expected to confirm the economy continued to grow in January, despite virus-containment measures that put a lid on retail sales and kept the hospitality sector sharply depressed. We see little reason to deviate from Statistics Canada’s preliminary call for a 0.5% monthly gain. Manufacturing and wholesale sales both rose solidly in January and hours worked were up 0.9% despite a plunge in (mostly part-time) employment. We look for another increase in output in February of 0.3% with retail sales having risen by 4% as shopping restrictions were relaxed.

Make no mistake, businesses in high-contact service sectors are still suffering. Restaurants, hotels, recreation and other services made up 80% of the shortfall in total hours worked (versus pre-shock levels) across private-sector industries in February. Outside these industries, manufacturing sales softened, falling 1% in February according to Statistics Canada’s flash estimate, as production disruptions triggered by a global chip shortage continue to dampen transportation-sector supply. Still, a solid manufacturing PMI print for the same month hints at robust demand and production trends outside the auto sector, and we expect the March report next week will tell a similar story. CFIB’s monthly business barometer sentiment indicator hit its highest level in almost a decade in March.

Near-term concerns will remain focused on a third coronavirus wave in much of the country. Whether it can be blunted quickly enough by accelerating vaccine distribution remains the biggest question for the near-term economic recovery. Still, the light at the end of the COVID tunnel is getting brighter, with just over 10% of the Canadian population now having received at least one shot of two-dose vaccines.

Week ahead data watch:

  • Canada’s February industrial production price index will be more closely watched than usual, given recent surges in raw material prices. While input-price volatility rarely flows all the way through to broader consumer prices, we look for some firming later in 2021 as services spending recovers.
  • In the US, vaccinations are progressing rapidly and restrictions are easing nationwide. This tees up for another month of job gains in March, building on February’s large 379k rise.