Canada’s economic engine is showing early symptoms of fatigue
Canadian households, the main driver of the country’s economy for the past decade, are showing signs of spending fatigue.
An uptick of 0.4 per cent in retail sales matched expectations, but excluding automobiles they were flat, trailing the median forecast of a 0.4 per cent gain. Inflation also missed expectations, and the lacklustre figures sent the currency down for the third straight day.
The data support the Bank of Canada’s view of an economy that’s slowing from an exceptionally robust period of growth last year. Friday’s reports may also call into question how quickly policy makers led by Governor Stephen Poloz, who held rates steady this week, can raise borrowing costs back to more normal levels.
“There are no red flags here,” Benjamin Reitzes, a Canadian rates and macro strategist at BMO Capital Markets, said by phone from Toronto. The numbers are “still consistent with them going in July.”
The consumer price index climbed 2.3 per cent from a year earlier, the most since October 2014, Statistics Canada said from Ottawa. That lagged the consensus forecast of 2.4 per cent, and the monthly increase of 0.3 per cent also trailed expectations.
Canada’s dollar reversed gains after the release, and was down 0.4 per cent to C$1.2722 against its U.S. counterpart at 11:02 a.m. Toronto time. Futures trading showed the odds of an interest-rate increase at the central bank’s May 30 meeting slipped to 39 per cent, from 45 per cent on Thursday. There’s a 69 per cent chance of a July increase.
“The deluge of data released today in Canada generally under-performed consensus expectations, but not by enough to alter the overall outlook for the economy,” Royce Mendes, economist at CIBC World Markets in Toronto, wrote in a research note. “The underwhelming readings on prices will delay calls for an acceleration in Bank of Canada rate hikes.”
The 12-month pace of retail spending slipped to 3.5 per cent, well below the unsustainable 8.7 per cent of October. “It’s still strong. It has softened,” Nathan Janzen, senior economist at Royal Bank of Canada, said by phone from Toronto.
The numbers suggest enough slack remains in the economy to prevent a surge in inflation, at least for the time being, bolstering the central bank’s view. Stripping out a 17 per cent gain in gasoline prices the inflation rate was 1.8 per cent, unchanged from February, and the average of the Bank of Canada’s three preferred core measures was little changed at about 2 per cent in March.