july 2018 canadian employment rose in june onward and upward us … · 2018. 7. 19. · 7 us likely...

CANADIAN EMPLOYMENT ROSE IN JUNE

ONWARD AND UPWARD

US LIKELY HAD A BANNER Q2 FOR GDP GROWTH

CANADIAN GDP SET TO REMAIN VOLATILE—BUT TRENDING HIGHER

CANADIAN HOUSING FINALLY FOUND ITS FOOTING IN JUNE

July 2018

ECONOSCOPE, © ROYAL BANK OF CANADA

IN BRIEF

Volume 42, Number 7

July 2018

RBC ECONOMICS

RESEARCH

Craig Wright SENIOR VICE PRESIDENT &

CHIEF ECONOMIST

Dawn Desjardins

VICE PRESIDENT &

DEPUTY CHIEF ECONOMIST

Paul Ferley ASSISTANT CHIEF ECONOMIST

MACROECONOMICS

Robert Hogue SENIOR ECONOMIST

REGIONAL ECONOMIES

Nathan Janzen SENIOR ECONOMIST

MACROECONOMICS

Josh Nye ECONOMIST

FINANCIAL MARKETS & MACROE-CONOMICS

Joseph Allegritti RESEARCH ASSOCIATE

Rannella Billy-Ochieng’

ECONOMIST

Claire Robbins

ECONOMIST

Ramya Muthukumaran

ECONOMIST

EDITOR

Brian Waterman

[email protected]

SUBSCRIPTION INFORMATION

[email protected]

Highlights This Month

3 CANADIAN EMPLOYMENT ROSE IN JUNE

Employment rose 32k in June to more than retrace modest declines

in the prior two months.

6 ONWARD AND UPWARD

Trade talk tensions continued to grab headlines and influence mar-

kets over the last month.

7 US LIKELY HAD A BANNER Q2 FOR GDP GROWTH

We are now tracking a 4.1% annualized increase in Q2 GDP that

would be one of the strongest quarterly gains in the last decade.

9 CANADIAN GDP SET TO REMAIN VOLATILE—BUT TRENDING

HIGHER

Canada’s economy had a slow start to Q2, though it wasn’t as bad

as feared with GDP eking out an above-consensus 0.1% gain in

April.

13 CANADIAN HOUSING FINALLY FOUND ITS FOOTING IN JUNE

Following a longer-than-anticipated adjustment to tighter mortgage

rules, many Canadian housing markets showed signs of stabiliza-

tion in June.

ECONOSCOPE® is published and produced monthly by RBC Economics Research. Address all correspondence to the Editor, RBC Economics Research, RBC, 9th Floor,

South Tower, 200 Bay Street, Toronto, Ontario, M5J 2J5.

© Royal Bank of Canada. The material contained in Econoscope is the property of Royal Bank of Canada and may not be reproduced in any way, in whole or in part,

without express authorization of the copyright holder in writing.

The statements and statistics contained herein have been prepared by RBC Economics Research based on information obtained from sources considered to be

reliable. Royal Bank of Canada makes no representation or warranty, express or implied, with respect to its accuracy or completeness. This publication is for the

information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities. Econoscope is indexed in the Canadian

Business Index available online in the Canadian Business & Current Affairs Database.

® Registered trade-mark of Royal Bank of Canada

Printed on recycled and recyclable paper.


CURRENT TRENDS Paul Ferley, Nathan Janzen, Josh Nye

HIGHLIGHTS

▲ GDP growth in April rose 0.1% fol-lowing solid gains of 0.3% and 0.4% in March and February, respectively.

▲ Employment rose 32k in June to more than retrace modest declines in the prior two months.

▲ Retail sales fell 1.2% in nominal terms and 1.4% excluding the impact of prices in April.

▲ Housing starts jumped to an annu-alized 248k from 194k in May. Market expectations had been for a more moderate rise to 210k.

▲ The ~$900 million deterioration in the merchandise trade balance in May only partially retraced a $2.1 billion improvement in April.

▲ Headline inflation rate held at 2.2% in May, lower than market expecta-tions.

CANADIAN APRIL GDP RISES MODESTLY

LATEST AVAILABLE: APRIL

RELEASE DATE: JUNE 29, 2018

GDP rose 0.1% in April following solid gains of 0.3% and 0.4% in

March and February, respectively. Much of the slowing was due to

transitory factors that are expected to have reversed in May. For

Q2 as a whole we are assuming annualized GDP growth of 2.2%

up from the 1.3% recorded in Q1. The pace of growth over the

second half of 2018 is expected to be buffeted by a complete shut-

down of a major oil sands production facility in July due to a trans-

former malfunction. This could send Q3 growth back down closer

to the Q1 growth rate though Q4 activity will likely bounce back

with growth rising to around 2 1/2%. We still expect annual 2018

growth of 1.9%, slower than 2017’s 3.0% gain.

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

2012 2013 2014 2015 2016 2017 2018

Real GDP % change, month-over-month

Source: Statistics Canada


CANADIAN EMPLOYMENT ROSE IN JUNE,

BUT SO DID THE UNEMPLOYMENT RATE

LATEST AVAILABLE: JUNE

RELEASE DATE: JULY 6, 2018

Employment rose 32k in June to more than retrace modest

declines in the prior two months. Employment has been

little changed on average this year following robust gains in

2017. June’s job gains were concentrated in goods-

producing industries with construction and manufacturing

employment paring back earlier declines. Services employ-

ment fell after four months of solid gains. The participation

rate rose 0.2 ppts, pushing the unemployment rate higher.

But at 6.0% in June unemployment is near multi-decade

lows and is consistent with most estimates of full employ-

ment. Wages were up 3.5% year-over-year with the strong-

est gains in Ontario and BC. Both provinces raised mini-

mum wages this year though their labour markets are also

among the tightest in the country.

CANADIAN RETAIL SALES DROPED SHARP-

LY IN APRIL

LATEST AVAILABLE: APRIL


Much of the big 1.2% drop in nominal retail sales —1.4%

controlling for the impact of price changes — was account-

ed for by a 4.3% plunge in auto and parts sales. Statistics

Canada noted that most of that decline came from Ontario,

where bad weather may have played a role in keeping

shoppers at home. Soft sales at building material and

clothing stores also could have been impacted by a late

spring in parts of the country. If true, that should mean a

bounce-back in May and June sales.

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Unemployment rate% of labour force


-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2012 2013 2014 2015 2016 2017 2018

Retail sales% change, month-over-month



CANADIAN JUNE HOUSING STARTS

SOAR

LATEST AVAILABLE: JUNE


Housing starts jumped to an annualized 248k from

194k in May. Market expectations had been for a more

moderate rise to 210k. The strength was concentrated

in urban multiples which jumped 46.4% to a record high

173k from 118K in May. CMHC, which compiles the

data, commented on wide spread strength in high rise

residential construction in Ontario particularly within the

City of Toronto, Mississauga and Vaughan. Urban mul-

tiples are volatile as the measure can reflect sizeable

projects starting construction in a single month that was

seemingly a factor in June. Our expectation is that this

component will likely retrace most of the June jump

contributing to overall starts moving closer to 200k.

CANADA’S TRADE DEFICIT WIDENED TO

$2.8 BILLION IN MAY

LATEST AVAILABLE: MAY


The ~$900 million deterioration in the merchandise

trade balance in May only partially retraced a $2.1 bil-

lion improvement in April. That leaves net trade still

tracking a bounce-back in Q2 after transportation back-

logs appeared to weigh on the balance in Q1 — poten-

tially adding a percentage point or more to Q2 GDP

growth. Export volumes ticked down 0.6% in May.

That was largely due to a pullback in auto exports that

Statistics Canada attributed to a transitory disruption in

supply of some parts from the United States and re-

traced little of a 4.2% jump over the prior two months.

100

120

140

160

180

200

220

240

260

280

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Housing startsThousands

Source: Canadian Mortgage and Housing Corporation

300

350

400

450

500

550

600

650

2010 2011 2012 2013 2014 2015 2016 2017 2018

Exports

Imports

Merchandise tradeC$ billions, annualized



CANADIAN INFLATION RUNNING COOLER

THAN EXPECTED

LATEST AVAILABLE: MAY


Canada’s headline inflation rate levelled out at 2.2% in May

as a sharp jump in gasoline prices was largely offset by fall-

ing prices for telephone services, traveller accommodation

and computers. This defied expectations that the headline

rate would hit 2.6%. The bank’s core inflation measures av-

eraged 1.9% slipping below April’s 2% print. The data, while

lower than market expectations, was largely in line with the

bank’s forecast for a 2.3% average rate in Q2 with the core

measures holding close to 2%.

-2

-1

0

1

2

3

4

5

2012 2013 2014 2015 2016 2017 2018

Consumer price index% change, year-over-year


Lastest

month

Previous

month

Year

ago

Real GDP Apr 0.1 2.5

Industrial production Apr 0.4 5.2

Employment Jun 0.2 1.2

Unemployment rate* Jun 6.0 6.5

Manufacturing

Production Apr 0.8 3.5

Employment Jun 0.7 0.4

Shipments Apr -1.3 3.6

New orders Apr -1.6 2.8

Inventories Apr 2.2 8.4

Retail sales Apr -1.2 1.6

Car sales Apr -5.6 -2.0

Housing starts (000s)* Jun 248.1 213.3

Exports May -0.1 0.0

Imports May 1.7 3.5

Trade balance ($billlions)* May -2.8 -1.0

Consumer prices May 0.1 2.2

* Levels are shown for the latest period and the same period a year earlier.

Source: Statistics Canada, RBC Economics Research

% change from:

ECONOMY AT A GLANCE


Trade talk tensions continued to

grab headlines and influence mar-

kets over the last month. After

their exemptions from US steel

and aluminum tariffs were allowed

to expire, Canada, Mexico and

the EU all hit back with retaliatory

tariffs on select US goods. Trump

doubled down with threats to im-

pose stiff levies on auto imports in

what would amount to significant

escalation of the trade spat. As

with steel and aluminum, it’s up to

the Commerce Department to

determine whether auto imports pose a national security risk—a process that could extend into next year. US

trade measures against China are also at risk of escalating. The US slapped tariffs on $34 billion of Chinese im-

ports and is evaluating action on another $16 billion. After China retaliated in kind, the Trump administration put

forth another $200 billion in goods that could be subject to tariffs come September. The president also threatened

to shake up the international trade order by hinting the US could pull out of the World Trade Organization.

Trade risks are clearly on the rise. But with some economies already at capacity and growth appearing to pick up

in Q2, central banks are pushing ahead with plans to remove monetary policy stimulus. The Fed raised rates

again in June as strong economic data drowned out firms’ complaints about tariffs and trade uncertainty. The

Bank of Canada did the same in July after their survey of businesses showed growing capacity pressures and

strong order books were exerting more influence than deteriorating trade rhetoric. The European Central Bank

announced plans to end net asset purchases at the end of this year, with rate hikes likely in the second half of

2019. And we expect the Bank of England will raise their benchmark rate in August. Trade-related risk aversion is

weighing on government bond yields, and that will likely remain a factor over the second half of the year. But with

several central banks still in tightening mode, we think market interest rates will drift higher from here.

ONWARD AND UPWARD

FINANCIAL MARKETS

Josh Nye

“Trade risks are clearly on the rise. But with some econo-

mies already at capacity and growth appearing to pick up in

Q2, central banks are pushing ahead with plans to remove

monetary policy stimulus.”


FINANCIAL MARKETS

Our expectation has been that the US

economy would rebound in Q2 following

a relatively slow start to the year. Re-

cent data have supported that idea—

and then some. We are now tracking a

4.1% annualized increase in Q2 GDP

that would be one of the strongest quar-

terly gains in the last decade. We think

the increase was broadly-based with

consumer spending, housing and busi-

ness investment all making solid contri-

butions. The standout, however, is likely

to be exports which have trended higher

over the last four months. That sent

May’s trade deficit to its lowest level in a

year and a half, suggesting net trade will

add more than a percentage point to

GDP growth in the second quarter.

We don’t think Q2’s export growth will

be sustained, particularly in light of US

import tariffs that have generally been reciprocated by trading partners. That trade skirmish (we still don’t think this

qualifies as an all-out trade war) stands to weigh on both export and import flows. But while less strength in exports

means Q2’s 4% GDP growth should be a one-off, we think strong domestic demand will keep the economy ex-

panding at an above-trend pace over the second half of the year. Both households and businesses remain upbeat

despite deteriorating trade relations. Consumer confidence is likely being buoyed by a strong labour market and

rising wages, as well as an equity market that has held up well in the face of growing trade risks. Businesses are

complaining of rising cost pressures related to tariffs and general uncertainty surrounding trade policy, but strong

order books have left most with a positive outlook overall.

JOB GROWTH SHOWS NO SIGN OF SLOWING

With another solid increase in June, US employment rose at an above-200k pace for a third consecutive quarter.

Job gains have shown little sign of slowing despite some of the lowest unemployment rates we’ve seen in dec-

ades. And as June’s household survey showed—the unemployment rose on a jump in labour force participation—

there are still people sitting on the sidelines who can be attracted into the workforce by good prospects of finding a

job. To that end, the share of consumers saying jobs are hard to get hit a 17-year low in June. Hiring has remained

strong even as employers are increasingly complaining of labour shortages. The Fed’s latest Beige Book indicated

firms are responding to talent shortages by increasing compensation, but thus far the upward trend in wage growth

has been protracted. Average hourly earnings were up 2.7% in June, compared with a 2.6% pace two years ago.

US LIKELY HAD A BANNER Q2 FOR GDP GROWTH

Josh Nye

▲ We think US GDP growth picked up above 4% in Q2, one of the

best quarterly growth rates in the last decade.

▲ The unemployment rate rose in June as more Americans were

drawn into the labour force, encouraged by the prospects of find-

ing a job.

▲ With fed funds getting further from its crisis lows, the Fed dropped

their well-worn guidance that rates will remain below neutral for

some time.

▲ Changes to the Fed’s economic and interest rate projections were

minor, but all leaned hawkish.

HIGHLIGHTS


CHAIR POWELL PUTS HIS STAMP ON FED POLICY STATEMENT

The Fed raised their benchmark rate by 25 basis points in June—a unanimous decision that was fully expected by

markets. The move was announced in a pared down policy statement that leaned hawkish. Most significantly the

Fed drop their forward guidance that rates will remain below neutral “for some time.” Chair Powell downplayed that

change in language at his press conference, noting it simply reflects that rates are now closer to neutral. His com-

ment that the Fed’s policy outlook hasn’t changed was backed up by the dot plot, which showed only a minor shift

among some committee members’ expectations for monetary policy—even if that was enough to move the median

from three to four total hikes in 2018. Other forecast changes were relatively minor but mirrored the more hawkish

policy statement. Growth and inflation projections were revised slightly higher this year while the unemployment rate

is expected to be even lower.

Longer-term US Treasury yields have pulled back since the Fed’s June 13 policy statement, with the 10-year bench-

mark down more than 10 basis points. We think that move reflects safe haven flows amid rising trade risks rather

than shifting expectations for monetary policy. Over the second half of the year we expect further Fed tightening and

ongoing fiscal stimulus (necessitating more borrowing) will be the dominant factors influencing Treasuries. We see

the 10-year yield moving back above 3% on a sustained basis.

-6

-4

-2

2

4

6

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Bureau of Economic Analysis, RBC Economics Research

U.S. real GDP Quarter-over-quarter, annualized % change

Forecast

1

2

3

4

5

6

7

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Federal Reserve Board, RBC Economics Research

Forecast

%

U.S. Target Rate


FINANCIAL MARKETS

Canada’s economy had a slow start to

Q2, though it wasn’t as bad as feared

with GDP eking out an above-

consensus 0.1% gain in April. Some of

the slowdown relative to the previous

two months reflected adverse weather

conditions that weighed on retail sales

and construction activity (but boosted

the utilities sector). Unplanned shut-

downs—a familiar theme this year—at

some refineries dinged manufacturing

output. Nonetheless, solid momentum

heading into the quarter and an expec-

tation that transitory weakness was sub-

sequently reversed leaves us monitoring

above-trend GDP growth in Q2.

Volatility in Canadian GDP data will con-

tinue in the second half of the year. A

shutdown at a major oil producer

through all of July, with production ex-

pected to gradually return in August and September, will weigh on energy output in the third quarter. Our early esti-

mate of a 1/2 percentage point drag on annualized growth has us tracking a 1.6% increase in Q3 GDP. With that

decline expected to be fully unwound in the fourth quarter, we see growth rebounding to an above-trend pace. On

net we have lowered our growth forecast for 2018 as a whole to 1.9% from 2.0% previously, which would still be

slightly ahead of our estimate of the economy’s longer-run potential.

CANADIAN BUSINESSES REMAIN OPTIMISTIC

The Bank of Canada’s quarterly Business Outlook Survey painted an upbeat picture of economic conditions de-

spite growing trade uncertainty. Firms reported strong sales over the past year and, even with more modest gains

expected going forward, solid foreign and domestic demand was seen supporting order books. Companies boost-

ed their hiring plans, and while investment intentions slipped somewhat, they were still described as “buoyant.”

Hiring and investment decisions are being driven by growing capacity pressures and labour shortages. Meanwhile,

strong demand conditions were allowing businesses to pass on rising input costs to their customers. That likely

contributed to further firming in inflation expectations—about 2/3 of respondents now expect inflation to be on the

higher side of 2%, up from less than 1/3 at this time last year.

BANK OF CANADA RAISES RATES DESPITE GROWING TRADE IMPACT

With economic data evolving largely as expected and businesses appearing to look past growing trade uncertainty,

market odds of a July rate hike rose significantly. The Bank of Canada delivered on those expectations, raising the

overnight rate by 25 basis points for the first time since January. There was some speculation we’d see a dovish

hike given rising trade tensions, but the BoC took recent developments in stride. They didn’t waffle on their bias to

CANADIAN GDP SET TO REMAIN VOLATILE—BUT TRENDING HIGHER

Josh Nye

▲ Despite a slow start to the quarter, we think GDP growth rose to

an above-trend pace in Q2.

▲ Upcoming GDP data will be choppy with Q3 set to be hit by an

unplanned shutdown in the oil sands.

▲ Business sentiment improved in Q2 as strong demand and grow-

ing capacity pressures helped offset trade worries.

▲ The BoC stuck to their tightening bias in July despite assuming an

even larger economic impact of trade tensions.

HIGHLIGHTS


raise rates gradually and as in May they refrained from using the word “cautious”. They did mark down their growth

forecasts somewhat more, with tariffs and trade uncertainty now expected to lower Canadian GDP by 2/3 of a percent

by the end of 2020 (the impact was expected to be a bit less than 1/2 ppt in April’s forecast). But the economy is still

expected to grow at a 2% pace over the next few years, slightly ahead of its potential rate thanks to some supportive

factors like higher oil prices. So even with trade issues weighing on business investment and exports, those sectors

are expected to make decent contributions to growth this year and next. That will be an important factor offsetting the

impact of higher rates and tighter mortgage regulation on consumers and housing. All told, with the economy operating

close to full capacity and growth expected to remain above potential, higher rates are needed to keep inflation in

check.

Looking ahead, the trade backdrop will remain key to the rates outlook and we think the BoC’s assumed impact from

tariffs and trade uncertainty will remain fluid. But their forecast for slightly above-potential growth perhaps gives them a

bit of leeway on that front. And Governor Poloz was keen to point out that the monetary policy implications of trade

actions aren’t necessarily clear cut. Overall we remain comfortable with our call for official rates to rise another 25 ba-

sis points in the fourth quarter, with two further hikes expected in the first half of 2019.

-10

-8

-6

-4

-2

0

2

4

6

8

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Statistics Canada, RBC Economics Research Forecasts

Canada's real GDP Quarter-over-quarter % change, annualized rate

Forecast

0

1

2

3

4

5

6

7

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Bank of Canada, RBC Economics Research Forecasts

%

Bank of Canada Overnight RateForecast


FINANCIAL MARKETS

Evidence continues to mount that the

UK economy’s Q1 slowdown was tran-

sitory. A new monthly GDP series from

the Office for National Statistics showed

output was up 0.2% and 0.3% in April

and May, respectively. Those gains

were led by the services sector, particu-

larly retail and wholesale trade which

appear to have recovered from a weath-

er-related dip in March. Survey readings

are providing a similar signal, with the

composite PMI rising throughout Q2 to

hit a year-to-date high in June. We think

these data support our forecast for GDP

growth to rebound to 0.4% in the sec-

ond quarter. The BoE took a similar

view at their latest meeting, noting that

recent data provided reassurance that

Q1’s slowdown was largely temporary

(their Q2 forecast is also at 0.4%). Inter-

est rates were left unchanged in June but the vote was split 6-3 (compared with 7-2 in May) with the dissenters fa-

vouring an immediate rate hike. While no additional forward guidance was provided, we think that hawkish shift fore-

shadows a rate increase in August.

Our forecast assumes further moves will be gradual, with a follow-up rate hike not expected until 2019. The BoE is

likely to keep monetary policy somewhat accommodative amid ongoing headwinds from Brexit uncertainty. Recent

political drama—two high-level cabinet ministers just resigned over Prime Minister May’s ‘soft’ approach to Brexit—

indicates there is still a ways to go before businesses get more certainty about the UK’s future trading relationship

with the EU. It also remains to be seen how European leaders will react to May’s plan, which appears to take some

liberties with a traditional customs union.

ECB ANNOUNCES TAPER, BUT WITH A DOVISH SPIN

A Euro area PMI readings settled into a lower gear in Q2, providing further evidence that growth has moderated in

2018 relative to last year’s impressive pace. That said, we think recent readings are still consistent with above-trend

growth (we expect 0.6% in Q2) that will continue to take up spare capacity in the economy. Inflation remains quies-

cent—while headline inflation just hit 2% for only the second time in five years, the core measure remains stuck at

1%. But tightening labour market conditions and gradually rising wages suggest inflation will pick up over the medium

term. Along with a solid economy, that was enough for the European Central Bank to announce in June that they’d

likely cease net asset purchases at the end of this year. Despite the short QE taper, which was unveiled earlier than

some expected, markets saw the meeting as dovish and the euro sold off. That was due to the central bank’s guid-

ance that interest rates are expected to remain at present levels at least through next summer—a bit later than mar-

kets were pricing in. Our expectation that gradual rate hikes will begin in the third quarter of 2019 remains unchanged.

BANK OF ENGLAND WATCHING FOR Q2 REBOUND

Josh Nye

▲ Recent data provide further evidence the UK economy rebounded

in Q2.

▲ There has been plenty of drama surrounding the UK government’s

plan for a ‘soft’ Brexit.

▲ The ECB’s forward guidance on rates gave their announcement a

dovish spin, despite the announcement that QE would likely end

this year.

▲ Australian employment isn’t growing fast enough to put sustained

downward pressure on the unemployment rate.

HIGHLIGHTS


MIXED INDICATORS KEEP THE RBA FROM SOUNDING TOO DOVISH

Australian retail sales came in above consensus for a second consecutive month in May, suggesting a pickup in con-

sumer spending after a slow Q1. However, we remain cautious on the outlook for households amid modest wage

growth, rising costs for non-discretionary spending and a slowdown in household borrowing. On wages, we think it will

take a sustained period of above-trend hiring for pay growth to rise more meaningfully. There was limited evidence of

that in the latest jobs data. While trend employment growth ticked higher in May, it remained short of the pace needed

to put sustained downward pressure on the unemployment rate (even if joblessness did fall in the latest month on lower

labour force participation). The overall GDP picture is somewhat more supportive—we think decent gains in public

spending, business investment and exports will keep growth around 3% this year and next. A similar outlook kept the

Reserve Bank of Australia from skewing dovish again in July, even in the face of rising risks to the global outlook. But

with slow wage growth keeping a lid on inflation, we doubt the RBA will join some of their global counterparts in tighten-

ing monetary policy this year.

-3

-2

-1

0

1

2

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Eurostat, RBC Economics Research

% change, quarter-over-quarter

Eurozone real GDP growth

Forecast

-1

0

1

2

3

4

5

6

7

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: ECB, RBC Economics Research

Forecast%

ECB refi rate


CANADIAN HOUSING FINALLY FOUND ITS FOOTING IN JUNE

Following a longer-than-anticipated adjustment to tighter mortgage rules, many Canadian housing markets

showed signs of stabilization in June. Unit sales rose 4.1% from the previous month, the first substantial in-

crease so far this year. Sales were up across the Prairies and Central Canada, while British Columbia con-

tinued to adjust to additional measures at the provincial level.

A slow spring for resales seemed to leave sellers unsure about market conditions, with new listings falling

1.8% month-over-month. It was the slowest June for new listings since 2009.

Opposite moves in resales and new listings led to slight firming in demand-supply conditions. At a national

level the sales-to-new listings ratio remains firmly in balanced territory, though conditions are closer to fa-

vouring sellers in Central Canada. Markets in Western Canada are generally more balanced, or slightly in

favour of buyers.

The national benchmark price was up just 0.9% from a year earlier, close to May’s pace. After the sharp de-

celeration over the last year, it looks like year-over-year price growth is starting to stabilize at a slow rate.

Prices remained below year-ago levels in several markets in Alberta, Saskatchewan and Ontario.

Signs of stabilization in many local housing markets should please policymakers who likely got a bit more

cooling than they bargained for out of new mortgage rules that took effect on January 1. Rising interest

rates, including another hike from the Bank of Canada last week, and stretched affordability will likely cap

any recovery over the second half of the year. But we think this more subdued sales pace and flatter price

growth is a positive development for the longer term health of the housing market.

Homebuyers are finally adjusting to stricter mortgage rules

It has been a longer-than-expected adjustment process, but a second consecutive increase in monthly home

sales indicates the market is finally adapting to regulatory changes this year that made it more difficult for some

buyers to qualify for a mortgage. The statistics released this morning by the Canadian Real Estate Association

showed resales in Canada rose 4.1% between May and June. But even with that sizeable monthly increase,

seasonally adjusted annualized sales of 457,500 represent the slowest month of June since 2012.

CURRENT ANALYSIS JOSH NYE


FORECAST DETAIL - CANADARBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS

= Forecast

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018 2019

Household consumption 4.0 4.3 3.1 2.2 1.1 1.6 1.9 1.9 1.7 1.7 1.6 1.7 2.4 3.5 2.0 1.8

Durables 12.2 7.2 -0.6 2.1 0.2 1.0 1.7 1.7 1.6 1.6 1.5 1.5 4.5 6.5 1.3 1.6

Semi-Durables 2.8 6.0 2.3 -0.7 0.0 1.0 1.9 1.9 1.8 1.6 1.8 1.8 2.2 3.3 1.1 1.7

Non-durables 2.1 5.6 0.4 3.5 -0.3 1.0 1.7 1.9 1.8 1.7 1.7 1.8 1.7 2.6 1.5 1.7

Services 3.0 2.8 5.2 2.0 2.1 2.1 2.0 2.0 1.8 1.8 1.7 1.8 2.2 3.2 2.5 1.8

Government expenditures 4.8 0.8 3.5 3.8 2.7 2.5 2.5 2.5 2.0 2.0 2.0 2.0 2.2 2.3 2.8 2.2

Residential investment 7.1 -1.3 -0.1 13.5 -7.2 -2.7 -4.8 -3.7 -2.1 -0.5 0.3 1.2 3.3 2.9 -1.0 -2.0

Business investment 14.3 7.5 5.9 8.0 10.9 2.8 2.3 2.1 2.0 2.0 2.0 2.0 -9.4 2.8 6.3 2.1

Non-residential structures 5.9 6.7 8.9 4.0 6.3 2.8 2.5 2.2 2.0 2.0 2.0 2.0 -11.5 0.7 4.8 2.1

Machinery & equipment 28.5 8.7 1.6 14.5 18.1 2.8 2.0 2.0 2.0 2.0 2.0 2.0 -6.0 6.0 8.6 2.0

Final domestic demand 4.9 3.2 3.6 4.1 2.1 1.7 1.6 1.7 1.6 1.6 1.7 1.8 1.1 3.0 2.6 1.6

Exports 2.6 6.4 -9.9 3.9 1.7 10.0 1.5 3.5 3.3 1.7 1.8 2.0 1.0 1.1 2.4 2.9

Imports 14.9 4.1 1.3 7.7 4.9 6.0 3.5 2.8 2.5 1.0 1.7 2.1 -1.0 3.6 4.8 2.5

Inventories (change in $b) 8.9 12.8 18.3 15.8 15.3 12.5 15.5 17.5 17.5 16.6 16.6 16.6 1.0 13.9 15.2 16.8

Real gross domestic product 4.0 4.6 1.7 1.7 1.3 2.2 1.6 2.3 1.8 1.7 1.7 1.7 1.4 3.0 1.9 1.9

OTHER INDICATORS YEAR-OVER-YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED

Business and labour

Productivity 2.2 2.6 1.1 1.1 -0.2 0.0 0.5 0.8 1.2 1.1 1.2 1.0 0.6 1.8 0.3 1.1

Pre-tax corporate profits 25.7 35.4 14.5 7.9 1.0 6.8 7.7 6.3 6.3 2.7 2.7 1.4 -1.9 19.9 5.4 3.2

Unemployment rate (%)* 6.6 6.5 6.2 6.0 5.8 5.9 5.8 5.8 5.8 5.8 5.8 5.8 7.0 6.3 5.8 5.8

Inflation

Headline CPI 1.9 1.3 1.4 1.8 2.1 2.3 2.7 2.6 2.3 2.6 2.4 2.2 1.4 1.6 2.4 2.4

Core CPI 2.0 1.4 1.4 1.6 1.8 1.7 2.1 2.2 2.1 2.5 2.3 2.2 1.9 1.6 1.9 2.3

External trade

Current account balance ($b) -55.9 -59.6 -71.7 -65.9 -78.0 -63.8 -64.9 -60.3 -57.9 -53.5 -51.6 -51.3 -65.4 -63.3 -66.7 -53.6

% of GDP -2.6 -2.8 -3.3 -3.0 -3.6 -2.9 -2.9 -2.6 -2.5 -2.3 -2.2 -2.2 -3.2 -2.9 -3.0 -2.4

Housing starts (000s)* 222 207 223 229 225 219 207 197 195 192 190 190 198 220 212 192

Motor vehicle sales (mill., saar)* 2.07 2.10 2.08 2.05 2.12 2.00 1.98 1.97 1.94 1.93 1.92 1.92 1.98 2.08 2.02 1.93

INTEREST AND EXCHANGE RATES %, END OF PERIOD

Overnight 0.50 0.50 1.00 1.00 1.25 1.25 1.50 1.75 2.00 2.25 2.25 2.25 0.50 1.00 1.75 2.25

Three-month 0.52 0.71 1.00 1.06 1.10 1.26 1.40 1.65 1.90 2.15 2.15 2.15 0.46 1.06 1.65 2.15

Two-year 0.75 1.10 1.52 1.69 1.78 1.91 2.10 2.30 2.45 2.45 2.40 2.35 0.75 1.69 2.30 2.35

Five-year 1.12 1.40 1.75 1.87 1.97 2.07 2.25 2.45 2.55 2.65 2.70 2.70 1.12 1.87 2.45 2.70

10-year 1.62 1.76 2.10 2.04 2.09 2.17 2.35 2.60 2.70 2.80 2.90 2.95 1.71 2.04 2.60 2.95

30-year 2.30 2.14 2.47 2.27 2.23 2.20 2.45 2.70 2.80 2.90 3.00 3.00 2.31 2.27 2.70 3.00

Canadian dollar 1.33 1.30 1.25 1.26 1.29 1.31 1.30 1.28 1.26 1.26 1.27 1.28 1.34 1.26 1.28 1.28

*Quarterly averages, level

Source: Bank of Canada, Statistics Canada, RBC Economics Research forecasts

GROWTH IN THE ECONOMY PERIOD-OVER-PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED

Annual2017 2018 2019


FORECAST DETAIL - UNITED STATESRBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS

= Forecast

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018 2019

GROWTH IN THE ECONOMY PERIOD-OVER-PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED

Consumer spending 1.9 3.3 2.2 4.0 0.9 2.9 3.2 2.7 1.7 2.3 2.3 1.8 2.7 2.8 2.6 2.4

Durables -0.1 7.6 8.6 13.7 -2.1 4.8 4.5 2.8 2.2 2.3 2.2 1.6 5.5 6.7 5.1 2.7

Non-durables 1.1 4.2 2.3 4.8 0.5 4.0 4.5 3.5 1.9 2.5 2.4 1.8 2.8 2.4 3.1 2.8

Services 2.5 2.3 1.1 2.3 1.5 2.2 2.6 2.5 1.6 2.3 2.3 1.8 2.3 2.2 2.0 2.2

Government spending -0.6 -0.2 0.7 3.0 1.3 0.6 2.4 2.7 2.4 2.4 2.4 2.4 0.8 0.1 1.5 2.3

Residential investment 11.1 -7.3 -4.7 12.8 -1.1 3.0 3.8 3.4 1.8 0.9 1.9 1.2 5.5 1.8 2.1 2.2

Business investment 7.1 6.7 4.7 6.8 10.4 5.0 6.5 5.7 2.8 2.8 2.6 2.6 -0.6 4.7 7.0 3.9

Non-residential structures 14.8 7.0 -7.0 6.3 16.2 4.0 6.5 5.2 4.0 4.0 2.0 2.0 -4.1 5.6 6.5 4.1

Non-residential equipment 4.4 8.8 10.8 11.5 5.8 5.3 7.2 6.5 3.5 3.5 0.7 0.1 -3.4 4.8 7.8 4.0

Intellectual property 5.8 3.7 5.2 0.9 13.1 5.3 5.2 5.0 4.8 3.6 2.6 2.6 6.3 3.9 6.2 4.3

Final domestic demand 2.4 2.7 1.9 4.5 2.0 2.7 3.5 3.1 2.1 2.5 2.2 1.8 2.1 2.5 2.9 2.6

Exports 7.3 3.5 2.1 7.0 3.6 11.0 2.0 2.5 3.0 2.8 2.8 2.8 -0.3 3.4 5.1 3.2

Imports 4.3 1.5 -0.7 14.1 3.2 0.0 7.4 6.0 5.4 3.0 2.8 3.2 1.3 4.0 4.6 4.5

Inventories (change in $b) 1.2 5.5 38.5 15.6 13.9 11.0 14.0 23.0 27.0 27.0 27.0 32.0 33.4 15.2 15.5 28.3

Real gross domestic product 1.2 3.1 3.2 2.9 2.0 4.1 2.8 2.8 1.8 2.4 2.2 1.8 1.5 2.3 2.9 2.4

OTHER INDICATORS YEAR-OVER-YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED

Business and labour

Productivity 1.1 1.4 1.5 0.9 1.3 1.5 1.0 1.4 1.4 1.2 1.2 1.0 0.1 1.2 1.3 1.2

Pre-tax corporate profits 3.3 6.4 5.4 2.7 6.8 8.3 4.8 5.7 4.2 2.8 2.6 2.1 -2.1 4.4 6.4 2.9

Unemployment rate (%)* 4.7 4.3 4.3 4.1 4.1 3.9 3.8 3.8 3.8 3.7 3.7 3.7 4.9 4.4 3.9 3.7

Inflation

Headline CPI 2.5 1.9 2.0 2.1 2.2 2.7 2.7 2.6 2.4 2.6 2.6 2.5 1.3 2.1 2.6 2.5

Core CPI 2.2 1.8 1.7 1.8 1.9 2.2 2.3 2.3 2.2 2.2 2.3 2.4 2.2 1.8 2.2 2.3

External trade

Current account balance ($b) -431 -487 -414 -465 -496 -443 -485 -517 -539 -548 -553 -560 -433 -449 -485 -550

% of GDP -2.3 -2.5 -2.1 -2.4 -2.5 -2.2 -2.4 -2.5 -2.6 -2.6 -2.6 -2.6 -2.3 -2.3 -2.4 -2.6

Housing starts (000s)* 1231 1171 1172 1259 1317 1285 1300 1315 1315 1315 1325 1325 1177 1208 1304 1320

Motor vehicle sales (millions, saar)* 17.1 16.8 17.1 17.7 17.1 17.1 17.3 17.3 17.3 17.3 17.4 17.4 17.5 17.1 17.2 17.4

INTEREST RATES %, END OF PERIOD

Fed funds 1.00 1.25 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 3.25 3.50 0.75 1.50 2.50 3.50

Three-month 0.76 1.03 1.06 1.39 1.73 1.93 2.15 2.35 2.65 2.90 3.15 3.35 0.51 1.39 2.35 3.35

Two-year 1.27 1.38 1.47 1.89 2.27 2.52 2.65 2.80 3.00 3.25 3.40 3.55 1.20 1.89 2.80 3.55

Five-year 1.93 1.89 1.92 2.20 2.56 2.73 2.95 3.10 3.25 3.45 3.55 3.65 1.93 2.20 3.10 3.65

10-year 2.40 2.31 2.33 2.40 2.74 2.85 3.15 3.30 3.45 3.60 3.70 3.75 2.45 2.40 3.30 3.75

30-year 3.02 2.84 2.86 2.74 2.97 2.98 3.35 3.50 3.65 3.75 3.80 3.85 3.06 2.74 3.50 3.85

Yield curve (10s-2s) 113 93 86 51 47 33 50 50 45 35 30 20 125 51 50 20

*Quarterly averages, level

Source: Bank of Canada, Statistics Canada, RBC Economics Research forecasts December 2016

Annual2017 2018 2019


CANADA - US COMPARISONS CURRENT ECONOMIC INDICATORS

FROM

PRECEDING

MONTH

FROM

YEAR AGO

YEAR-TO-

DATE

LATEST

MONTH

FROM

PRECEDING

MONTH

FROM

YEAR AGO

YEAR-TO-

DATE

LATEST

MONTH

Industrial production* 0.4 5.2 1.6 Apr. 0.6 3.8 0.0 Jun.

Manufacturing inventory -

shipments ratio (level) 1.4 1.4 1.4 May. 1.4 1.4 1.4 May.

New orders in manufacturing 4.9 11.9 2.1 May. 0.4 9.2 -0.7 May.

Business loans - Banks 1.3 8.8 7.0 May. 0.9 5.4 6.6 Jun.

Index of stock prices** 1.3 7.2 1.9 Jun. 2.0 13.2 9.6 Jun.

Retail sales -1.2 1.6 4.9 Apr. 0.5 6.6 3.5 Jun.

Auto sales 5.3 0.0 2.9 May. 0.1 -9.0 -8.2 Jun.

Total consumer credit*** 0.4 4.4 4.0 May. 0.6 4.8 5.1 May.

Housing starts 28.0 16.3 5.2 Jun. -12.3 -4.2 6.4 Jun.

Employment 0.2 1.2 1.2 Jun. 0.1 1.5 1.6 Jun.

Consumer price index 0.1 2.2 1.5 May. 0.1 2.8 1.40 Jun.

Producer price index**** 1.0 3.1 1.0 May. 0.0 3.9 0.3 Jun.

Policy rate 1.3 0.5 - Jun. 1.8 1.0 - Jun.

90-day commercial paper rates 1.7 1.0 - Jun. 2.1 1.1 - Jun.

Government bonds -

(10 years) 2.3 1.5 - Jun. 2.9 2.2 - Jun.

Seasonally adjusted % changes unless otherw ise indicated. Interest rates are levels.

*The U.S. series is an index.

**Canada = S&P/TSX; United States = S&P 500

***Excludes credit unions and caisses populaires

****Canada's producer price index is not seasonally adjusted

Business

Households

Prices

Interest rates

CANADA US

july 2018 canadian employment rose in june onward and upward us … · 2018. 7. 19. · 7 us likely...

Documents