Canadian real GDP rose 0.1 per cent in April with 12 of 20 industrial sectors posting growth in output. The manufacturing sector was a main contributor to overall growth in real GDP, expanding its output by 0.8 per cent in April while offices of real estate agents and broker was up 0.3 per cent, the industry's first positive growth in 2018.  With today's release, we are tracking second quarter real GDP growth in Canada at about 2 per cent.

Given solid economic growth and inflation firming around the Bank of Canada's 2 per cent target, the likelihood of a July rate increase from the Bank of Canada is fairly high. However, the threat of a damaging trade war will loom large over the Bank's ultimate decision.

 

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Canadian retail sales declined for the first time in three months, falling 1.2 per cent in April on a monthly basis. On year-over-year basis, retail sales in April were up just 1.6 per cent over last year.  Sales were down in 8 of 11 sub-sectors representing 65 per cent of total retail trade with the biggest declines coming in the motor vehicle and parts sector.  Conversely, in BC, retail sales were up 1.1 per cent on a monthly basis and 5.9 per cent year-over-year.

Canadian inflation, as measured by the Consumer Price Index (CPI), held steady at 2.2 per cent in May. Likewise,  the Bank of Canada's three measures of trend inflation were all essentially unchanged at 1.9 per cent.   In BC, provincial consumer price inflation was 2.7 per cent in the 12 months to May, the same rate of increase as in April. 

While we still expected at 25 basis point increase in the Bank's policy rate at its July meeting, today's poor retail sales figures and non-accelerating inflation, along with yet another Trump trade tantrum, may prompt some caution at the Bank of Canada.

 

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Canadian manufacturing sales fell 1.3 per cent on a monthly basis in April, dragged lower by a third straight month of declining sales of petroleum and coal products and a drop in transportation equipment shipments.  Sales were down in 10 of 21 manufacturing sub-sectors, representing about half of total manufacturing sales.  On a year-over-year basis, Canadian manufacturing sales were up 3.6 per cent over April 2017.

In BC,  manufacturing sales were down 0.1 per cent on a monthly basis but were up 7.6 per cent year-over-year. A strong forestry sector, particularly paper manufacturing, continues to be a significant driver of BC's manufacturing sales. That strength helped offset some weakness in sectors like machinery and equipment manufacturing and coal products.

 

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Vancouver, BC – June 15, 2018. The British Columbia Real Estate Association (BCREA) reports that a total of 8,837 residential unit sales were recorded by the Multiple Listing Service® (MLS®) across the province in May, a 28.7 per cent decrease from the same month last year. The average MLS® residential price in BC was $739,783, down 1.7 per cent from May 2017. Total sales dollar volume was $6.54 billion, a 30 per cent decline from May 2017.

“BC home sales continued to slow in May because of more stringent qualifications for conventional borrowers,” said Cameron Muir, BCREA Chief Economist. “The changes in mortgage policy are taking their toll on housing demand, not only in British Columbia, but across the country by reducing household purchasing power and housing affordability.”

While the decline in consumer demand has lifted the inventory of homes for sale, total active residential listings in the province are still relatively low by historical comparison.

Year-to-date, BC residential sales dollar volume was down 13.8 per cent to $26.4 billion, compared with the same period in 2017. Residential unit sales decreased 16.6 per cent to 35,976 units, while the average MLS® residential price was up 3.4 per cent to $733,616.

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Canadian employment declined by 7,500 jobs on a monthly basis in May, but was up 1.3 per cent compared to 1 year ago. The national unemployment rate remained unchanged for a second consecutive month at 5.8 per cent while total hours worked across the economy grew by 2 per cent.

In BC, employment fell by 12,000 jobs. For the first time since May 2015, employment in BC has recorded virtually zero growth on a year-over-year basis. Despite the loss of jobs, the provincial unemployment rate moved 0.2 points lower in May to 4.8 per cent due to a decline in the overall number of people actively searching for work.

 

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The total value of Canadian building permits declined 4.6 per cent on a monthly basis in April, with all classes of permits declining with the exception of commercial buildings. Year-over-year, the value of permits was up 6.5 per cent. 

The largest declines in permitting activity were posted in BC, which saw the total value of permits fall 22.6 per cent in April after posting a record high in March.  Year-over-year, total permits values were down only 1.9 per cent at $1.24 billion. Non-residential permits were down 31.8 per cent on a monthly basis  and were 28 per cent lower year-over-year. Residential permits fell 19.6 per cent on a monthly basis but were 10.1 per cent higher year-over-year.

Construction intentions in April were down in three of BC's four census metropolitan areas (CMA):

  • Permits in the Abbotsford-Mission CMA fell 26.7 per cent on a monthly basis to $23.8 million. Year-over-year, permit values were down more than half.
  • In the Victoria CMA, total construction intentions increased 16.4 per cent to $109.1 million , a 5.6  per cent rise over this time lats year.
  • In the Kelowna CMA, permits tumbled 30.6 per cent monthly basis, and were down 37.7 per cent year-over-year to $60 million.
  • The Vancouver CMA recorded permit activity valued at $755.9 million, falling 27.3 per cent from the over $1 billion in total permits registered in March. Year-over-year, permits were up 11.9 per cent.

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US Real GDP Growth (Q4'2016) - January 27, 2017


US real GDP growth registered a weaker than expected 1.9 per cent growth the final quarter of 2016, and 1.6 per cent growth for the year as a whole.  Growth was pulled lower by a widening US trade deficit, while consumer demand and business investment were robust. Most economists expect US economic growth to accelerate to about 2.2 per cent in 2017.

The pace of economic growth in the United States could be a key determinant in the BC housing market this year. While faster US growth is generally positive for the BC economy, a stronger pace of growth along with a possibly significant shift in the fiscal outlook due to the large tax cuts and ramped-up spending plans of the Trump administration, is already translating to rising long-term interest rates as markets anticipate higher inflation and consequent monetary tightening by the US Federal Reserve. In turn, that uptrend in rates is putting pressure on Canadian mortgage rates, with many lenders increasing their best offered rates. 

 

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Canadian Retail Sales - January 20, 2017


Canadian retail sales inched 0.2 per cent higher in November.  Sales were higher in just 5 of 11 sub-sectors, with motor vehicle and parts dealers and building materials supplies leading the way.  E-commerce sales accounted for 3 per cent of total retail sales, the highest proportion to date in 2016.  Given today's data,  we are currently tracking fourth quarter Canadian real GDP growth at 1.5 per cent. 

In BC, retail sales were down 0.7 per cent on a monthly basis, but were 5.5 per cent higher year-over-year.  Year-to-date, retail sales in the province are up 6.5 per cent. 


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Canadian Manufacturing Sales - January 19, 2017


Canadian manufacturing sales rose 1.5 per cent in November after posting a moderate decline the previous month.  Sales were higher in 14 of 21 manufacturing sub-sectors. After adjusting for inflation, the total volume of sales was 1.2 per cent higher. 

In BC, where the manufacturing sector is a significant employer and a key driver of economic growth, sales were up 2.4 per cent on a monthly basis and 9.2 per cent year-over-year. The manufacturing sector has been on a significant upswing after a slow first half with sales posting nearly 8 per cent growth over the second half of the year. That growth is adding to already strong momentum in other sectors and supporting housing demand across BC communities where manufacturing, particularly of forestry products, is an important driver of local economic activity. 


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Bank of Canada Interest Rate Announcement - January 18, 2017


The Bank of Canada announced this morning that it is holding the target for its overnight rate at 0.5 per cent. In the press release accompanying the decision, the Bank noted that uncertainty in the global outlook, particularly with regard to policies in the United States, is undiminished. The Canadian economy is forecast to grow 2.1 per cent in both 2017 and 2018, implying the Canadian economy will return to full capacity in mid-2018.  On inflation, the Bank noted that it continued to be lower than expected but should return to it 2 per cent target in coming months.

Political uncertainty in the United States will likely govern the direction of both policy rates and long-term bond yields over the next year. The interest rate on 5-year government of Canada bonds has risen to its highest point in a year, which is adding upward pressure to mortgage rates offered by Canadian lenders.  While the Canadian economy is forecast to post steady growth in 2017, overall slack in the Canadian economy remains persistent.  Without a significant uptick in economic growth, inflation will likely continue to trend at or below the Bank's 2 per cent target.  That, along with lingering uncertainty, will keep the Bank sidelined through 2017 with a chance of lowering its target rate should current downside risks to the economy become realized.


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