Canadian Economic Outlook Looks Gloomy
After starting out the year with a bang, the Canadian economy appears to be slowing down. In the first quarter, Canada’s gross domestic product (GDP) was 3.7%1 and in the second, GDP was an even stronger 4.5%.2 But now economic data points to a slowdown, and that could put the Bank of Canada’s rate hikes on hold.
On the surface, the Canadian economy is doing well, GDP has been strong for two consecutive quarters and job creation is going up. At the same time, Canada’s manufacturing sectors are facing uncertainty. In July, manufacturing sales fell 2.6% to $52.5 billion. In June, manufacturing sales were down 1.9%.3
Canada’s trading deficit with major trading partners widened in August for the third consecutive month, to $3.4 billion from $3.0 billion. This represents the fifth-largest shortfall.4
In August, export sales slipped one percent from July. In July, export sales were down 2.6% month-over-month and in June they were down 1.9%. On top of that, Canadian exports of raw materials and consumer goods are also down.
The reason? Canadian exports are being weighed down in part by a stronger dollar, which is a result of recent interest rate hikes. Since early May, the Canadian dollar has gained 10% on the U.S. dollar, rising from $0.7284 to $0.8010.
In September, the Bank of Canada raised its key lending rate to one percent from 0.75%.5 This follows a first rate hike in July to 0.75% from 0.50%.6 Central banks lower the lending rate when the economy is doing poorly in an effort to encourage consumers and businesses to borrow and spend.
Conversely, the central bank will raise rates when the economy is doing well in an effort to cool it down. In general, the loonie rises when rates climb because it shows the Bank of Canada has confidence in the economy.
A strong Canadian dollar can also eat away at exports, though. Thanks to softening economic data, third-quarter GDP is forecast to come in at 2.5%. Right now, it appears as though the Bank of Canada will not raise interest rates again until 2018.
In the short term, Canadian economic and jobs data could get worse. Sears announced plans to shutter all of its remaining stores and liquidate its stock, a move that will also mean the loss of around 12,000 jobs. To put that into perspective, the Canadian economy added 10,000 new jobs in September.7
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- “Gross domestic product, income and expenditure, first quarter 2017,” Statistics Canada, May 31, 2017; http://www.statcan.gc.ca/daily-quotidien/170531/dq170531a-eng.htm.
- “Gross domestic product, income and expenditure, second quarter 2017,” Statistics Canada, August 31, 2017; http://www.statcan.gc.ca/daily-quotidien/170831/dq170831a-eng.htm.
- “Monthly Survey of Manufacturing, July 2017,” Statistics Canada, September 9, 2017; https://www.statcan.gc.ca/daily-quotidien/170919/dq170919a-eng.htm?HPA=1&indid=3628-1&indgeo=0.
- “Canada’s trade deficit widens to $3.4 billion in August,” CBC, October 5, 2017; http://www.cbc.ca/news/business/trade-deficit-1.4339696.
- “Bank of Canada increases overnight rate target to 1 per cent,” Bank of Canada, September 6, 2017; http://www.bankofcanada.ca/2017/09/fad-press-release-2017-09-06/.
- “Bank of Canada increases overnight rate target to 3/4 per cent,” Bank of Canada web site, July 12, 2017; http://www.bankofcanada.ca/2017/07/fad-press-release-2017-07-12/.
- “Sears closing will erase more jobs than Canada added in the month of September,” Global News, October 12, 2017; https://globalnews.ca/news/3796556/sears-closing-job-losses/.
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