Canada: Strengthening growth, falling inflation - Scotiabank

Derek Holt, VP & Head of Capital Markets Economics at Scotiabank, estimates Canada’s 0.4% m/m GDP growth in March and just under 5% growth in Q1 over Q4 at a seasonally adjusted and annualized rate.

Key Quotes

“If that happens—or anywhere close to it—then Canada will have led the world’s advanced economies on growth to start 2017 albeit amidst frustrating evidence that hopes for a global acceleration are so far being dashed. In non-annualized terms, March witnessed a 1.2% m/m rise in retail sales volumes, a 0.6% rise in wholesalers’ volumes, a 1.1% advance in hours worked, a 19% rise in housing starts albeit skewed toward multiple housing units (+31%) with less value-added than singles (+2.7% m/m) and a small rise in manufacturing shipment volumes (+0.2%).”

“If a solid rebound of 0.4% is registered for March, then based upon monthly GDP figures, Q1 probably grew by around 4.7% q/q at a seasonally adjusted and annualized rate. It has been almost six years since the Canadian economy grew at an equal or greater quarter-ago pace (5.7% in 2011Q3). A caution is that monthly GDP measures industrial GDP versus quarterly GDP estimates that are broken down by expenditure types; the two sources can be off in their tracking of quarterly GDP growth in either direction but usually not by enough to materially deny a strong outcome.”

“Is strong growth sustainable? A hint may arrive with April’s trade figures on Friday. There may be downside risk to export volumes after a large 2½% m/m gain in March and we’re expecting a decline. Export volumes during April would only have to give back 0.7% m/m of the 2.5% rise in March in order to result in no growth being tracked at this early stage in Q2.”

“Will inflation rise as growth has closed the traditional output gap? That’s anything but clear. Over the full period since 1993 for which the common component measure of CPI is available, there is about a 50% correlation between the output gap lagged five quarters (which the BoC says is best) and common component CPI in year-ago terms. Over the post-recession period from 2010–2016, however, this correlation entirely disappeared. Domestic output gaps are hardly the only driver of inflation expectations and so it is therefore not necessarily the case that the market is underestimating inflation risk. Further, there are different measures of output gaps—the integrated framework measure still flags slack—and broader measures of slack. Output gaps are malleable concepts subject to often arbitrary modelling of the economy’s speed limit while subject to quite large estimation ranges.”