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Leading indicators of Canadian economy still pointing (somewhat) higher

Leading indicators of Canadian economy still pointing (somewhat) higher

Nearing the end of what appears to have been a relatively lacklustre year, the most recent indicators of economic growth are still sending mixed signals.

Turning first to the really big picture, in its latest(November) Economic Outlook, the OECD noted that “a further sharp slowdown in emerging market economies is weighing on global economic activity and trade.”

While the OECD expressed increased concern about the health of the global economy in general, it was definitely more upbeat about near term prospects for the U.S.

Despite the fact that the OECD Leading Indicator of U.S.economic activity has slipped from a recent (July 2014) high of 100.6 to 99.1 in September of this year, the OECD noted that U.S. output remains on a solid growth trajectory propelled by domestic demand.

This more upbeat outlook for the U.S., the market for over 75% of Canadian exports, is reinforced by several current and forward-looking economic indicators.

Probably the most important indicator of current activity is the very strong (271,000) gain in total employment. Indeed, based on the U.S. household employment survey, full-time hiring has exhibited very strong growth over the past several quarters. Further, the fact that real weekly earnings are up by 2.3% in September 2015 compared to 0.7% a year earlier suggests that personal incomes are finally starting to recover.

Consistent with the strong pattern of full-time hiring and the concomitant acceleration in real weakly earnings, consumer confidence reported by the University of Michigan increased by 4.3% in November, taking the measure of consumer expectations to its highest level since June of this year.

Fuelled (literally) by the relative increase in disposable incomes stemming from low oil prices, rising employment and the recent upturn in consumer confidence, sales of motor vehicles hit a record high of 18.6 million units largely due to strength in sales of domestic vehicles.

Looking forward, after a brief retreat (to 48.7) in September, the MNI Chicago Business Barometer Index rebounded to 56.2 in October, its highest value since January of this year. Further, although the Conference Board’s Index of Leading Indicators retreated slightly to 123.3 in September, it remains close to its recent 9-year high of 123.5, achieved in June of this year.

Turning to Canada, although there are clear signs that the economy has picked up speed following back-to-back declines in the first two quarters, the prospects for growth are overshadowed by increased concern about the negative impact of recent declines in oil prices on energy investment in Western Canada.

Consequently, despite the relatively upbeat pattern of recent indicators of U.S. economic activity, the prospects for Canada appear more guarded. For example, although, the CFIB’s Business Barometer exhibited a solid 5.8% m/m increase in October, at 58.9% it was well below its year ago level of 67.8%.

Also, after posting a solid 10.9% gain (to 58) in August,the Ivey PMI exhibited back-to-back declines of -6.9% m/m and -1.7% in September and October. Assuming that the drag on the economy due to weak energy investment gradually dissipates over the next couple of quarters, we expect that the positive combination of stronger U.S. demand for exports of manufactured goods, especially motor vehicles and parts, plus a late-year increase in fiscal stimulus, will cause the economy to gain momentum heading into 2017.

Given this strengthening external demand and a pickup in investment later in the year, we expect the Canadian economy to expand by 2.3%in 2016 following a gain of 2.4% in 2014 and an estimated increase of 1.2% in 2015.


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