January 9, 2012
Canada stands firmly in the middle of the road as it enters 2012
Chief Economist, CanaData
I’m not sure what T. S. Eliot would have thought about the matter, but 2011 is closing out with neither a bang nor a whimper.
Based on the difficulty of prognosticating over the past couple of years, the author of “The Waste Land” would probably have been glad he was a poet and not an economist.
It’s interesting to note, though, that the title of his most famous work certainly could have been applied to much of the world’s financial sector in the most recent recession.
It also threatens to have meaning for Europe, if it can’t get its debt problems in order in 2012.
In Canada, most of the recent data series are yielding results that are in the mid-range of historical patterns.
The results are neither bullishly high nor bearishly low.
In the latest month, October, the value of merchandise sold by shopkeepers was 4.4% higher than at the same time last year.
A year-over-year sales gain of +5% is the “norm”. In the U.S., through all of 2011 so far, retail sales have been +7% or higher.
That’s in a country where a great deal more fuss has been made about the need to scale back “reckless” spending than in this country. It just goes to show how difficult it is to rein in people’s wants and desires.
The inflation rate in Canada (+2.9%) is a little faster than we might like, but it’s still within manageable bounds. The lesson seems to be that central bankers only get truly alarmed about price hikes when they rise above 4.0%.
The “core” inflation rate, which omits highly volatile food and energy components, is almost exactly on target at +2.1%.
Housing starts in the latest month (181,100 units annualized) dropped back to where they are more sustainable, in the opinion of most analysts. They rose above 200,000 units several times in the summer and early fall.
Capacity utilization rates in the country — both for total industry and for manufacturing — have returned close to normal, slightly over 80%.
Motor vehicle sales have recovered about half of their peak-to-trough decline, although it’s been entirely thanks to the “vans, truck and buses” category, since passenger car sales remain flat and depressed.
The international price of oil is near $100 U.S. per barrel, well down from several previous highs (in 2008 and earlier this year), but also a big improvement versus its most recent low point in 2009.
Even the price of gasoline has settled down somewhat. This past summer, it was +30% year over year, but it has moderated to less than half that increase at present.
There are some exceptional anomalies in the economy that should be mentioned, particularly since they will continue to influence events when the calendar flips over into January 2012.
Interest rates continue to be remarkably low. The Bank of Canada’s 1.00% overnight rate won’t likely be seen again for decades, once it begins an upward shift.
A figure between 3.00% and 3.50% is considered neutral (i.e., neither too stimulatory nor too restrictive) under normal circumstances.
Some regions of the country are doing better than others. For example, year-over-year retail sales gains in Saskatchewan (+10.6%) and Alberta (+10.4%) have been exceptionally strong.
This is just one demonstration of how provinces rich in resources — in the West and in parts of the East (e.g., Newfoundland and Labrador) are outstripping their industrialized counterparts in the centre of the county.
Year-over-year retail sales gains in Quebec (+1.9%) and Ontario (+2.6%) weren’t nearly as impressive. If inflation is factored in, those two provinces didn’t experience actual volume gains at all.
These kinds of statistics are emblematic of the population shifts going on in the country.
Immigrants are increasingly choosing to locate near mega resource construction projects and our fellow Canadians are moving to where the jobs are more assured.
At the same time, however, a surge in condominium construction has been surprising just about everyone, except the developers themselves, in Vancouver and Toronto. While it’s great to see the forests of construction cranes, one has the sense the industry may be headed for an abrupt adjustment.
The major negative for Canada at the moment can be found in the merchandise trade data. In the latest month, Canada again recorded a deficit. The nation used to be able to count on a $40 to $80 billion annualized surplus every month.
A little math reveals an astonishing and perhaps not widely known feature about the Canadian economy.
Goods exports comprise nearly 30% of Canada’s gross domestic product. 72% of our exports go to the United States. (By the way, that figure was 82% ten years ago.) Therefore, 20% of the total output of the country is destined for consumption south of the border.
While it is important that we align more of our foreign sales towards emerging nations — especially since they so dearly want our raw materials and intermediate products — it’s also obvious Canada remains highly dependent on the U.S. economy.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog.
