The Bank of Canada’s monetary policy announcement was the main event last week, which I already covered in a commentary, so I won’t go into a lot of details. The Bank announced an end of its Quantitative Easing (QE) program, with future bond purchases restricted to reinvestment of maturing bonds. The central bank also changed its forward guidance, indicating that they anticipate raising interest rates sooner, but the start will likely not be before next spring. The change in policy stance was clearly a response to the fact that inflation is higher than previously anticipated – inflation measured by the Consumer Price Index is currently at an 18-year high – and the temporary factors lifting inflation are lasting longer than expected.
While the price environment does argue for reducing monetary stimulus, the pace of economic recovery supports the Bank’s decision not to raise rates immediately. After posting an unexpected small contraction of 1.1% annualized in the second quarter, the Canadian economy is tracking an only moderate gain of roughly 2.0% in the third quarter. This perspective can be gleaned from the latest monthly real GDP by industry report. The economy grew by 0.4% in the month of August, which was below Statistics Canada’s preliminary estimate of 0.7%. Moreover, the statistical agency reported that the initial survey data is pointing to flat reading in September.
The implication is that Canada is not getting surge in economic activity that was hoped for as government restrictions eased. The reasons are likely two-fold. First, the impact of the Delta variant was significant, and this meant that there was little momentum heading into the third quarter and health risks remained elevated in certain provinces. Second, global disruption to supply chains and the resulting bottlenecks that have been created are acting as a significant headwind on economic growth. Both the health risks and the supply chain problems should diminish with time, setting the stage for stronger economic activity in the coming quarters – but the recovery is proving more protracted.
In terms of the industry details in August, services-producing industries led the way with growth of 0.6%. This offset a 0.1% decline in manufacturing. Within services, the dominant narrative was a recovery in the hardest pandemic-hit industries, as air transportation surged 24.2%, accommodation jumped 11.3%, entertainment and recreation climbed 6.4% and food services rose 5.4%. Retail trade also recorded a solid increase of 1.8%. On the goods-producing side of the leger, manufacturing rose 0.5% in August, but this only offset part of the 1.6% decline in July. Construction and mining, quarrying and gas extraction were roughly flat.
Last week, Statistics Canada also released the Industrial Product Price Index (IPPI), which reflects the prices that producers in Canada receive as their goods leave the production plant. It does not include transportation costs or indirect taxes. It is a price index that gets little attention, but given the current focus on inflation, it is worth keeping an eye on. The overall industrial product prices were up 14.9% year-over-year in September. Energy products were a key source of the increase, being up a whopping 61.3% over the twelve months. However, the ex-energy IPPI was still up 11.3%. The biggest contributors were chemicals, fabricated metal products, packaging and containers that all recorded increases of more than 20%. Food, plastic and rubber, pulp and paper, and non-ferrous metal products all had increases of more than 10%.
During the pandemic, industrial product prices fell 3% during the initial lockdown and economic contraction, but they have increased 19% since then. The concern is that the higher product prices get passed along to consumers, accelerating benchmark inflation. To some extent this has already happened. The good news is the IPPI has flattened out since May, and as such the year-over-year change should moderate in the coming months.
Lastly, the Canadian Federation of Independent Business (CFIB) published their Business Barometer. This is a favorite economic release on mine because it provides some perspective on how small and medium-sized firms are faring. Remember that this pandemic hit smaller firms harder than larger firms. The good news is that small business confidence rose slightly in October, as did the outlook of businesses, and the share of firms looking to increase their payrolls rose. However, the share of firms indicating that business conditions are ‘bad’ rose from 19.1% to 23%. Moreover, 49.3% reported shortages of skilled workers and 39.8% were having difficulty finding semi-skilled and unskilled workers. Businesses reported that they expected to raise prices by 3.9% over the coming year and lift wages by 2.5%. These results highlight that the outlook for growth remains favourable, but also emphasizes the on-going inflation and labour shortage risks.
Categories: Canadian Economic Outlook, Canadian Employment, Canadian Inflation, E-Sight, Economics
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