The Canadian economy started 2018 with a modest contraction of output, down 0.1% in January. While a few industries stood out for the strength of their retrenchments, weakness was fairly widespread as only 10 of 20 major industries reported gains on the month.
Leading the way lower were the goods-producing sectors. A sizeable pullback in mining, quarrying, and oil and gas extraction (-2.7%) was led by declines in oil and gas as a number of facilities saw unplanned maintenance shutdowns. The remaining goods industries displayed mixed performances, with surprising strength in construction (+0.5%) and manufacturing (+0.7%).
On the services side, despite a sizeable pull-back in a number of sectors, notably real estate (-0.5%) and arts and entertainment (-0.8%), service producing sectors as a whole eked out a tiny gain (+0.007%), good enough to mark a 22nd straight month of expansion. This is now the second-longest expansion of the sector on record. Helping keep the sign positive were wholesale and retail trade (+0.5% and +0.2% respectively), as well as administrative and related services (+0.5%) and finance and insurance (+0.3%)
This year started off with more of a whimper than a bang, at least from a growth perspective. Part of this was by design, as government policy changes hammered real estate activity. There were also some one-off movements elsewhere, including an unexpected pull-back of oil and gas on the back of unscheduled maintenance activities. However, with only 10 of 20 industries in the green, it is hard to find a lot to like in today’s numbers. If there is a silver lining, it is that some areas, notably oil and gas, are likely to see a rebound in February.
As usual though, the trend is more important than the noise. Clearly the pace of economic activity has moderated from last year’s red-hot first half performance, but this is to be expected in an economy with little slack remaining. Our current tracking of 1.4% growth in the first quarter may be a reflection of the noise, but over the medium-term, Canada’s economic fundamentals remain consistent with growth in the 1.5% to 1.9% range – enough to maintain inflationary pressures and ongoing (modest) job gains.
All the noise of late does make the Bank of Canada’s job that much harder however. The 1.4% tracking is a far cry from the 2.5% the Bank of Canada was expecting in January, but at the same time, inflation has ticked up markedly so far this year. All eyes are bound to be focused on how these developments are treated in April’s interest rate decision and Monetary Policy Report. With economic risks still elevated and inflation seemingly boosted by a number of one-offs (such as minimum wage changes), it is likely that the output data will carry the day. This should result in continued caution from the Bank of Canada, consistent with recent communications.