table of contents - microsoft · table of contents what we’ll be ... creation in the first half...

September 1, 2017

Table of Contents What we’ll be watching ............. p. 4 Calendar of upcoming releases .... p. 5 Annex – Economic tables ............ A1

Week in review CANADA: In the second quarter of 2017, expanded a consensus-topping 4.5% annualized (2.9% in nominal terms). Trade contributed to growth as exports rose faster than imports. This was complemented by persistently strong domestic demand. In this regard, healthy gains in consumption spending (thanks to a 6.6% annualized surge in real disposable income, its steepest jump in seven years), government expenditures and business investment more than offset a contraction in residential investment. Inventories added to growth as well, albeit ever so slightly. The economy’s performance in Q2 means that growth in the first half of the year was a stunning 4% annualized. Such vigour over a six-month period had not been seen since the second half of 2011. Growth would have been even more impressive had Canadians not saved as much – the savings rate rose three ticks to 4.6% in Q2. Topping things off was a solid handoff to the third quarter, as GDP expanded 0.3% in June. Still, we expect GDP growth to moderate in Q3 because the stellar pace of employment creation in the first half of the year and the related gains in household income are unlikely to be repeated so soon. The housing wealth effect, too, is expected to wane as house price inflation softens. Nonetheless, given the better-than-expected showing in the first half of the year, we upgraded our GDP growth forecast for 2017 to 3.0%.

Again in Q2, the deficit widened C$3.4 billion to C$16.3 billion (roughly 3.6% of GDP). This was due largely to a larger goods trade deficit, which went from C$1.9 billion in Q1 to C$5.2 billion further to a decline in the terms of trade (ratio of export prices to import prices). The services deficit, however, narrowed slightly from C$5.7 billion in Q1 to C$5.5 billion. As a result, the overall trade deficit expanded C$3.0 billion to C$10.7 billion. Separately, the primary income deficit swelled C$0.5 billion to C$5.0 billion as the investment income deficit increased by a similar amount to C$4.6 billion. Canada’s persistent current account deficit renders the country dependent on foreign capital inflows. This would not be such a bad thing if the inflows were in the form of long-term, stable fixed direct investments. Unfortunately, direct investments by Canadians abroad have lately outpaced by far investments by foreigners in Canada, resulting in a net outflow of FDI. This means that short-term portfolio investments are the main source of financing, a fact that leaves Canada (and the loonie) vulnerable to sudden shifts in investor sentiment. In Q2, net inflows into Canadian securities amounted to C$35.4 billion, the bulk of which in the form of bonds.

declined from 55.5 in July to 54.6 in August but still signalled a healthy expansion in the sector. The monthly decline of the overall index was driven in part by new orders, which registered their slowest rate of expansion this year. Production also expanded at a weaker pace than prior. On a positive note, August’s survey showed Canadian manufacturing firms adding workers at the steepest rate since data collection began in October 2010. That was also the 11th consecutive month of expansion for manufacturing payrolls.

According to the , in June, average weekly hours worked were flat m/m and down 1.3% y/y. Average weekly earnings, for their part, expanded 0.3% m/m and 1.8% y/y (same annual rate as for May).

2017Q2 2017Q1

GDP 4.5 3.7

Consumption 2.6 2.7

Business Investm. 0.8 1.4

Nonprofit sector 0.0 0.0

Residential Investm. -0.4 0.9

Government 0.5 0.2

Domestic Demand 3.5 5.1

Exports 3.0 0.5

Imports -2.4 -4.7

Trade 0.6 -4.2

Inventories 0.1 3.2

Stat. discrepancy 0.2 -0.3-5

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Canada: Economic boom in first half of 2017

NBF Economics and Strategy (data via Statistics Canada)

q/q % chg. saar Nominal GDP

Real GDP

Q2

Real and Nominal GDP Contributions to real GDP

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Current account deficit FX reservesFDI net outflows Portfolio/other net inflowsStatistical discrepancy

Canada: Overly dependent on short term capitalBalance of payments

NBF Economics and Strategy (data via Statistics Canada)

Fina

ncin

g needs

So

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s of finan

cing

C$ bnExternal deficit entirely financed by short term foreign capital inflows

for the seventh consecutive quarter

Weekly Economic Watch

2

UNITED STATES: The Bureau of Economic Analysis revised up from 2.6% to 3.0%, the highest quarterly rate

in two years. Upgrades in personal consumption and business investment more than offset downgrades in government spending. Housing’s negative contribution remained roughly unchanged. All in all, real final sales grew 3.0% annualized, better than the 2.6% increase estimated earlier. Adding to the good news was the fact that inventories were not a factor in the upgrade, which was driven entirely by domestic demand. The upward revision to Q2 growth raises the chances of the Fed announcing the start of balance sheet reduction at its forthcoming meeting in September and hiking rates again before the year’s end.

rose just 156K in August, much lower than

the 180K expected by consensus. Adding to the disappointment was a 41K total downward revision to the two prior months’ data. In August, the private sector added 165K jobs, the smallest tally since May. Goods sector employment was up 70K, with gains in manufacturing and construction. The private services sector created a net 95K jobs (lowest since March), driven by business services and education. Government cut payrolls for the second month in a row, again mostly at the state level. Average hourly earnings rose 0.1%, leaving the year-on-year wage inflation rate unchanged at a disappointing 2.5%.

Released at the same time, the (similar in methodology to Canada's Labour Force Survey) showed a decline of 74K jobs in August. That, coupled with an unchanged participation rate, caused the unemployment rate to rise one tick from 4.3% to 4.4%. Full-time employment fell again in the month, more than offsetting gains for part-time positions.

The rose 2.5 points to a 6-year high of 58.8 in August as several of its sub-indicators showed ample gains. The inventories sub-index, for instance, jumped 5.5 points to 55.5, its highest level since September 2010. The production tracker registered more modest gains (+0.4 point to

61.0) but continued to indicate strong expansion. The job creation sub-index was a particular bright spot in the report as it surged 4.7 points m/m to 59.9, thereby reporting the fastest expansion of payrolls in 6 years. Of the 10 sub-components of the index, half were above their 6-month moving average. Furthermore, 14 of the 18 manufacturing industries covered in the ISM survey reported growth in August, indicating a broad-based expansion in the manufacturing sector.

In August, the climbed to 122.9 from 120.0 in July. This was well above its 12-month moving average of 114.7 and within range of its cyclical high of 124.9 struck in March. The details of the report showed the present situation tracker jumping 5.8 points to a 16-year high of 151.2. This bump was in good part driven by tightening conditions on the labour market. To be sure, respondents that deemed jobs plentiful exceeded by 18.1 percentage points those that found jobs hard to come by, the largest such margin since 2001. The expectations sub-index, which tracks consumer expectations for the next six months, rose 1.0 point to 104.0. Looking ahead, we expect several factors to weigh on consumer confidence, notably the looming debt ceiling impasse in Washington, fading hope for tax reform and, above all, Hurricane Harvey. Major storms have had a significant negative impact on consumer confidence in the past. Hurricane Katrina, for instance, initially caused a 18-point drop in overall confidence.

In July, nominal grew 0.4% month on month after staying level in June. The wage/salaries component of income rose 0.5% while disposable income increased 0.3%. Year on year, headline income growth was a lacklustre 2.7% and the wage/salaries component was in even lower at 2.5%. However, both metrics have accelerated recently. Indeed, in the last six months for which data are available, headline income grew an annualized 3.5%, driven by a noteworthy 5.1% increase in wage/salaries. , increased 0.3% in July on higher spending on goods (+0.6%). Adjusted for inflation, both disposable income and spending climbed 0.2% in the month. Meanwhile, the dipped to 3.5% from 3.6% in June.

Contributions to

real GDP growth

Q2

2nd est.

Q2

Advance est.

GDP 3.0 2.6

Consumption 2.28 1.93

Business Investm. Equip./Intell. 0.67 0.50

Business Investm. Struct. 0.18 0.14

Residential Investm. -0.26 -0.27

Government -0.05 0.12

Domestic Demand 2.8 2.4

Exports 0.45 0.48

Imports -0.23 -0.31

Trade 0.2 0.2

Final Sales 3.0 2.6

Inventories 0.0 0.0

NBF Economics and Strategy (data via Datastream)

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U.S.: Consumer confidence boosted by tight labour market

NBF Economics and Strategy (data via Datastream)

Labour differentialConference Board‘s measures of consumer confidence

Overall

Present situation

Index

Expectations

16-year high

Consumer confidence is hovering near its cyclical high…

…in part because jobs are plentiful

%


3

Still in July, both the headline and the core were up 1.4% y/y, undershooting the Fed’s 2.0% target for the 61st straight month.

contracted for a second month in a row, retracing 0.6% in seasonally adjusted term in July after a -1.4% reading in June. The monthly decline was due to the non-residential sector, which saw construction outlays falling by 1.7%. Alternatively, spending on residential construction augmented 0.8%. Construction fell in both the private (-0.4%) and the public (-1.4%) segments. Year on year, overall construction outlays were up a meagre 1.8%, the lowest 12-month rate of expansion since November 2011.

According to the , home prices in June inched up 0.1% m/m in seasonally adjusted terms. Of the 20 cities covered by the index, 16 registered higher prices, led by Seattle (+0.8%), Las Vegas (+0.6%) and San Diego (+0.6%). On a 12-month basis, the unadjusted 20-city index was up 5.7%, with prices rising at a particularly brisk pace in west-coast cities, especially Seattle (+13.4%) and Portland (+8.2%). On the other hand, price hikes over 12 months were more subdued in Cleveland (+2.9%) Washington, D.C. (+3.1%), and Chicago (+3.3%). Home prices were supported countrywide by tight supply. More specifically, the inventory of homes on the resale market shrank 9.9% to 1.92 million in the year to July, equivalent to only 4.2 months of sales (<5.0 indicates a tight market).

slid 0.8% in seasonally adjusted terms in July after increasing 1.3% in June. The decline was the fifth in the first seven months of the year, a development that highlights the moderation observed lately in the U.S. housing market. Year over year, pending sales were down 0.5%. Again, the drop in contract signings was due in part to a tight supply.

WORLD: In the , the flash estimate of the pegged inflation at 1.5% y/y in August, up 0.2% from

the previous month. Headline inflation was driven essentially by higher fuel prices. To be sure, the energy component rose to 4.0% y/y from 2.2% the preceding month. Core inflation, which excludes energy, food, alcohol and tobacco, held steady from July at a lowly 1.2% y/y despite consensus-topping economic growth in Q2 and unemployment down to an 8-year low of 9.1% (according to July stats).

In August, the European Commission’s continued its ascension, rising 0.6 point to a

cyclical high of 111.9. The gain was driven by increased confidence in the manufacturing and services sectors, which account for 40% and 30%, respectively, of the overall index. Consumer confidence, which counts for 20%, was also on the rise. However, confidence in the retail and construction sectors, which account for 5% each, sank on the month.

In , the was unchanged in July at 2.8%. Prior to this year, such a level was last seen in the mid-90s. Meanwhile, the job-to-applicant ratio edged up to 1.52 as the number of applicants fell 0.4% and job offers stayed flat. These developments meant that there were more job offers per applicant in the country in July than at any time since February 1974. That resulted from a 6.3% surge in job offers in the 12 months to July coupled with a 4.2% drop in the number of applicants over the same period. Labour shortages seems particularly acute in the mining, manufacturing, and transportation sectors, where new job vacancies shot up 34.4%, 10.5% and 9.2% y/y, respectively. This compares with an average annual increase of 3.5% across all sectors.

In , the rose 0.5 point in August to 51.6. The increase was driven by the new order tracker, which expanded at its fastest pace in 37 months. Foreign demand was also reportedly buoyant as export orders registered their sharpest rate of growth since March 2010. This supported production, which showed a pace of expansion little changed from July’s five-month high. On a less positive note, China’s manufacturing firms continued to shed workers in August, albeit at a slower pace than in the prior month.

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Overall economic sentiment (L) Consumer confidence (R)Manufacturing confidence (R) Services confidence (R)

Eurozone: Economic sentiment at a cyclical high in August Economic sentiment index and its main components, last observation: August 2017

Index

NBF Economics and Strategy (data via Bloomberg)

Index

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Japan: Job-to-applicant ratio at its highest since 1974Unemployment rate vs. job-to-applicants ratio, last observation: July 2017

%

NBF Economics and Strategy (data via Bloomberg)

Unemployment rate (R)

Job-to-applicants ratio (L)

Unemployment is at its lowest level in 20 years…

…and the job-to-applicants ratio has hit levels unseen since February 1974

Weekly Economic Watch What We’ll Be Watching

4

In Canada, all eyes will be fixed on the central

bank’s After a noted bullish turn in the Bank’s narrative this summer and a rate hike in July, the question facing markets is whether or not the Bank of Canada’s policy will turn more hawkish. Indeed, there are several factors pointing in

the direction of further tightening, notably better than expected first half GDP growth and a stellar labour market. Moreover, looking ahead, provincial fiscal stimulus in B.C. and pre-election spending sprees in Ontario and Quebec should generate tailwinds for the Canadian economy. That being said, uncertainties regarding the U.S. debt ceiling showdown, still low inflation, and an appreciating Canadian dollar makes a BoC rate hike less likely next week. Our call is for the BoC to wait until October before raising its policy rate further. In other news, the

for the month of August will be available. In the year to July, the country has added nearly 390K jobs, the most since November 2007. What’s more, the last negative monthly print dates back to November (-2.4K), making the ongoing streak of positive gains the longest since the recession. It’s hard to believe that this can go on much longer and we’re consequently expecting a -10K reading in August, a result that would barely put a dent in this year’s spectacular tally. As for the unemployment rate, it could have inched up one tick to 6.4%. July’s will also be available. Commodity prices increased in the month but these gains were overshadowed by a steep appreciation of the Canadian dollar which may have restrained C$ revenues. Consequently, we’re expecting the goods trade deficit to widen to C$4.2 bn. We’ll also keep an eye on the release of for July.

In the U.S., a relatively light week will feature

July’s data for , and . Also, the latest iteration of the

Fed’s Beige Book will be published on Wednesday.

Elsewhere in the world, the European Central bank will hold a The strong euro and soft core inflation suggest that any decision regarding the asset purchase programme is likely to be postponed until the October 26 meeting.

for August will also be available for both Japan and China. Still in China, several economic indicators will be released for August including , , and .

Previous NBF forecasts

Bank of Canada overnight rate 0.75% 0.75%

LFS employment (August m/m chg.) 10.9K -10.0K

Unemployment rate (August) 6.3% 6.4%

Merchandise trade balance (July) -C$3.60 B -C$4.20 B

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Canada: A first negative print in 9 months in August?Employment and jobless rate

m/m chg. thousands

NBF Economics and Strategy (Source: Statistics Canada via Datastream)

Unemployment rate (R)

Employment (L)

NBF Forecast

%

Weekly Economic Watch Economic Calendar – Canada & U.S.

5

Weekly Economic Watch Annex – Economic Tables

A1


A2


A3


A4


A5


A6


A7


A8


Economics and Strategy

Montreal Office Toronto Office

514-879-2529 416-869-8598

Stéfane Marion Marc Pinsonneault Kyle Dahms Warren Lovely Chief Economist and Strategist Senior Economist Economist MD, Public Sector Research and Strategy [email protected] [email protected] [email protected] [email protected]

Paul-André Pinsonnault Matthieu Arseneau Jocelyn Paquet Senior Fixed Income Economist Senior Economist Economist [email protected] [email protected] [email protected]

Krishen Rangasamy Angelo Katsoras Senior Economist Geopolitical Analyst [email protected] [email protected]

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