Canada’s GDP lost steam in August, shrinking 0.1%. But economists aren’t concerned.
Benjamin Reitzes, strategist at BMO, says in a weekly economics report that two one-time factors hurt the recent GDP print:
- maintenance at a chemicals plant, which hit manufacturing hard and
- maintenance on an east coast oil platform, which put oil production lower.
“Absent those two factors, GDP would have come in at +0.1% (a low 0.1 but still positive),” he says. “While August was weak, the reversal of those factors suggests we’ll get a solid rebound in September.”
Reitzes’s takeaway: “Growth of around 2% isn’t bad, even though it will keep the BoC patient with further tightening as long as inflation pressures remain subdued.”
While BoC Governor Stephen Poloz has said several temporary factors exert downward pressure on inflation, those factors should lift in coming months, says Jean-François Perrault, senior vice-president and chief economist at Scotiabank, in an economics report.
Upside pressure for inflation, excess capacity
“Inflation […] has clearly bottomed and is rising,” Perrault says. “From its year-on-year low point of 1.3% in May, [the BoC’s] measure of inflation has accelerated at its most rapid pace in over six years.”
Along with upward momentum in inflation measures, he sees upward pressure on wages. He’s not the only one.
In a weekly economics report, James Marple, TD senior economist, assesses the BoC’s take on Canada’s excess capacity.
The BoC’s latest monetary policy report says that slack remains in the labour market, related to elevated long-term unemployment, low average hours worked and modest wage growth.
These three factors have shown improvement, says Marple.
First, for long-term unemployment, “Statistics Canada’s supplementary data show a rate of 2.2% for people unemployed for more than three months. This is the lowest level since prior to the recession,” he says.
Second, “on a year-over-year basis, average hours worked were up 1% in October,” he says. “Even more impressive, average hours are up 1.8% relative to the trough in January of this year.”
He further explains that there’s a long-term downward trend in average hours worked, which probably won’t reverse.
“Major steps down appear to occur around recessions, and then remain relatively steady,” he says. “This suggests that even as average hours continue to move higher, they may not go back to previously-observed levels.”
Third, year-on-year wage growth accelerated to 2.4% in October, from a trough of 0.5%.
“The indicator appears to be a lagging one,” he says. “Its recent acceleration is confirmation of strong economic growth and a good sign that inflation is likely to turn higher in the months ahead.”
His outlook: “As with the overall output gap, the labour market is increasingly giving an all-clear-ahead signal to the Bank of Canada to continue tightening monetary policy.”
Perrault agrees that the data point to tightening, and enumerates economic conditions that support a December hike, including an output gap that will “move further into excess demand during 2018,” on the back of sustained growth in GDP.
However, his outlook calls for the next hike to come in April 2018, because of “Governor Poloz’s recent focus on downside risks.”