Canadian economy takes unfair hit from global perceptions

On May 24, the Bank of Canada releases its interest rate statement. That’s a perfect time to stand up for Canada, says deputy chief economist Benjamin Tal of CIBC World Markets, in a weekly economics report.

Some support from the Bank would be appreciated, because people are avoiding investing in Canada due to rumblings about NAFTA and the Home Capital saga, says Tal. “The loonie and Canadian financials are off by roughly 3% recently,” he says.

Read: Look for GARP in these 2 sectors

And other economic indicators aren’t telling a different story.

“The equity market hit a 6-week low, while the loonie fell below 73 U.S. cents for the first time in over a year,” says Dina Ignjatovic, economist with TD Bank, in an economics report. The poor results were the result of an 8% plunge in crude oil prices to US$45 per barrel.

Read: Loonie to hit trough in Q3: forecast

Other recent economic data are mixed:

• The Canadian economy added just 3,000 jobs in April — all part time, says Ignjatovic. The unemployment rate fell to 6.5%, as 45,000 people left the workforce. Wage growth slowed to a record low of just 0.5% year over year.
• Auto sales slipped 1.6% year over year in April, but this follows a record-breaking quarter.
• Exports bounced back in March, helping to narrow Canada’s trade deficit. However, net trade will still be a drag on growth during the first quarter.

But “momentum in exports should continue going forward,” says Ignjatovic, “as the Canadian dollar remains under pressure and economic activity in the U.S. is set to pick up after a slow start to the year.”

Better net trade performance, along with improved business investment, should offset expected declines in housing activity the rest of the year.

“The Bank of Canada will be looking for such signs of a more sustainable growth path before moving off the sidelines,” says Ignjatovic.

As for the Home Capital saga, “The situation is contained, and the quality of the assets is solid. Any reference to that reality from the Bank will carry a lot of weight,” says Tal.

Rating agency DBRS downgraded Home Capital’s senior debt rating to CCC on May 3, but said Monday that “positively, HCG continues to take steps toward improving governance in a bid to restore market confidence.”

Read the full CIBC report.

Read the full TD report.

Also read: Were they right? This PM’s ‘not loading up on bonds’