Canadian economy strikes out on three pitches
OTTAWA - The Canadian economy was hit by a triple dose of bad news Friday as three major indicators — jobs, exports and housing starts — all tumbled in unison to cast doubt on an expected rebound in economic growth this winter and spring.
The data for December and January were all far worse than economists had anticipated, even though the expectations had been modest at best.
The headliner was a surprisingly large 21,900 job loss figure for January — the first setback in six months — and a 58,000 reduction in the number of Canadians looking for work, which produced the oddity of less employment coinciding with a drop in the unemployment rate to 7 per cent.
But the jobs report was actually the relative bright spot for the day.
Canada's trade sector continued to worsen as exports fell by 2.1 per cent in real terms in December — and exports to the U.S. dropped a full four points — while imports also fell.
The biggest shocker was the collapse in housing starts to 160,600 annualized for January, a 19 per cent tumble, as the combination of tapped out households and tighter mortgage rules continued to undermine what had been a pillar of strength for the economy.
"Canada struck out this morning with uniformly negative data," said Jimmy Jean of Desjardins Capital Markets.
"To be sure, care should always be taken in interpreting a single month but the housing starts trend has long been in place."
The Canadian dollar dropped by almost half a cent to below parity at 99.74 cents US on the gloomy news.
The negative results led to more calls for the government to switch to a more stimulative approach to the economy.
"With growth slowing to a snail's pace and commodity prices still low, it is becoming increasingly clear that the Conservative's status quo approach isn’t working for Canadians," said Peggy Nash, the NDP's finance critic.
Earlier in the week, Finance Minister Jim Flaherty was adamant that his main focus was on eliminating the deficit by 2015, although he conceded that if conditions take a turn for the worse, he would be "practical."
In Vancouver on Friday, Prime Minister Stephen Harper said he was "disappointed" but that he remained optimistic the trend in 2013 would be positive.
"We are in uncertain times, we keep telling Canadians this, and volatility in our economy given events in our export markets in particular is something we should not be surprised about from time to time," he said.
The negative economic reports Friday didn't come as a complete shock, although the misses in the key sectors were larger than expected.
Housing indicators have been dropping for most of the past six months in reaction to Ottawa's decision to increase the cost of taking out mortgages, a move that was widely praised by the economic community at the time, but may prove too toxic a medicine, say some now.
Soft global markets, the high loonie and special factors in the U.S. — including disruptions from Hurricane Sandy and concerns political intransigence would drive the U.S. budget over a cliff — had been hammering Canada's exports for months.
Also unsurprising was the jobs setback since payback was long overdue, say analysts. The 88,000 jobs gain in November and December alone had put the labour market well out of step with the overall weakness in the economy.
"Employment seemed to be defying gravity," said Doug Porter, chief economist with the Bank of Montreal. "This to me is a reflection of relatively sluggish growth in the second half of last year."
The question going forward is how long the current rough patch lasts. There are encouraging signs throughout the world, including Europe, where recent reports show economic growth picking up.
The Bank of Canada has slotted in a solid rebound in the current three months of 2013, from one per cent growth in the final quarter last year to 2.3 per cent.
There are reasons to support the optimism, although many economists have pointed out that Mark Carney's central bank has kept its rose-tinted glasses on far too long.
Export Development Canada chief economist Peter Hall remains an optimist on the trade front. He points out that demand is turning robust in Canada's biggest market to the south and in areas that matter to northern exporters — consumer spending, housing and autos.
Hall says inventories became depleted in the U.S. during the end of the year, perhaps due to fiscal cliff fears that have since been mostly averted. The logic is that as U.S. firms re-stock, they will need to turn to Canada for production.
"It could be that storm activity and worries about fiscal cliff arrested a lot of activity that didn't square with demand," he said. "I believe at the moment those inventories are being replenished and those will be reflected in some of our early numbers in 2013.
"Otherwise I can't see any rationale why Canada would be on the losing end of a good U.S. story," he added.
Others are not so sure. Better global conditions should indeed perk up exports, but Canada's economic coin has flipped, so that previous areas of strength — consumer spending, housing and government stimulus — are now facing down.
A housing correction is well under way, says David Madani of Capital Economics, and that will limit economic growth to about one per cent in 2013, half the Bank of Canada's projection.
Even on the exports side, Jean of Desjardins doubts the turnaround will be come quickly enough to provide much heat this winter or even in the spring. He notes that while fiscal cliff worries have subsided, the U.S. is still grappling with the issue of government spending cuts and the drag from higher payroll taxes that went into effect Jan. 1.
Another factor, said Jean, is that the U.S. appears to be importing less energy from Canada, perhaps because the country is becoming more self-sufficient.
"I think once we get really going in the U.S., possibly next spring, then we might be in better position to gain traction but for the moment the U.S. seems pretty self-sustained."