January 12, 2018 Table of Contents What we ll be watching... p. 4 Calendar of upcoming releases... p. 5 Annex Economic tables... A1 Week in review CANADA: decreased for the first time in three months in December, declining 34.7K (13.8%) to an annualized 217.0K units. Most of the retreat can be attributed to a 38.1K (22.0%) drop in urban area multiple starts, which dwarfed increases in the urban single (+2.8K or 4.7%) and rural (+0.6K or 3.3%) categories. However, starts declined in only three of the ten provinces: Ontario (-33.0K), Alberta (-11.5K) and PEI (-0.3K). The strongest gains were recorded in British Columbia (+4.7K), Quebec (+3.7K) and Manitoba (+0.8K). On a quarterly basis, starts advanced an annualized 13.5% in Q4 after surging 35.6% in Q3. Despite the jump, it is hard to tell whether residential construction contributed to economic growth in Q4. True, quarterly data showed a marked increase in multiple starts (+35.8% annualized), but ground-breakings for singles, which make a greater contribution to GDP per unit, fell 28.6% in annualized terms. Canada: New residential construction may have added to Q4 GDP Real new residential construction expenses and housing starts 140 120 100 80 60 40 20 0-20 -40-60 q/q % chg. saar Real new residential construction from national accounts (R) q/q % chg. saar Housing starts (L) -80 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 NBF Economics and Strategy (data via Statistics Canada and CMHC) In November, the value of applications slipped 7.7% m/m to $7.7 billion in seasonally adjusted terms. This was the first monthly drop in three months and the steepest since January 2016, but it followed an $8.3-billion reading in October, the largest ever. Construction intentions were down in both the residential sector (-4.6%) and the non-residential 80 70 60 50 40 30 20 10 0-10 -20-30 -40-50 sector (-12.3%, the largest pullback in 14 months). The value of residential permits issued for multiple units was down 10.1%. Alternatively, permit issuance for single units edged up 0.6%. On a 12-month basis, the total value of permit applications climbed just 1.3% as a sharp rise in the nonresidential sector (+13.8%) was offset by a decrease in the residential segment (-5.1%). The edged up 0.2% in December, interrupting a sequence of three monthly consecutive drops. Yet the gain in the Composite index was not broad-based, only five of the 11 constituent cities recording increases in the month. The main contributor was Vancouver (+1.3%), but gains were also observed in Winnipeg (+1.9%), Halifax (+1.9%), Ottawa- Gatineau (+0.4%) and Edmonton (+0.1%). Alternatively, prices fell in Toronto ( 0.3%), Victoria ( 1.0%), Calgary ( 0.6%), Hamilton ( 0.5%) and Montreal ( 0.2%). The index for Quebec City was flat. On a y/y basis, the Composite index rose 9.1%, a fifth softer reading in a row following the record gains of 14.2% posted in both June and July. December s y/y rise was led by Vancouver (+16.0%), Victoria (+11.5%), Hamilton (+11.3%) and Toronto (+9.0%). Although below the national average, noteworthy increases occurred in Montreal (+7.0%), Ottawa-Gatineau (+5.1%), Winnipeg (+4.0%) and Halifax (+3.6%). Gains were more subdued elsewhere. Vancouver the main driver of the Composite index in December 2.8 2.4 2.0 1.6 1.2 0.8 0.4 0.0-0.4-0.8-1.2-1.6 %m/m 2015 2016 2017 2018 NBF Economics and Strategy (Data from Teranet-National Bank House Price Index) Composite Without Vancouver The latest by the Bank of Canada showed business sentiment remained strong during the interview period from November 14 to December 8, as the survey s aggregate indicator returned near last summer s cyclical peak. Firms reported better sales growth in the past 12 months and expected it to remain positive over the next year. While some firms were concerned about U.S. trade policy, they were largely optimistic about export growth,
which was expected to accelerate thanks to strong U.S. demand and a weak Canadian dollar. Capacity pressures were more intense with 56% of respondents (a decade high) now stating either some or significant difficulties meeting an unexpected increase in demand. The proportion of respondents facing labour shortages also increased to a multiyear high. While wage pressures were not widespread, firms expected an increase due to minimum wage hikes. This heightened expectations of input price inflation, but those of output price inflation remained low as firms anticipated steeper competition to curb their ability to raise prices. Firms reported some easing in credit conditions, which was confirmed by the separately-released for 2017Q4 (also conducted by the BoC). Predictably, with capacity and labour pressures intensifying, firms were keen to increase employment and to invest in machinery and equipment. In this regard, the related measure of intentions rebounded sharply after dipping in the fall. Canada: Reasons to be upbeat about investment and hiring prospects 65 60 55 50 45 40 35 30 25 20 15 10 5 % Share of respondents with capacity pressures and labour shortages Rising capacity pressures Share of respondents with some or significant capacity pressures Share of respondents with labour shortages 2005 2010 2015 NBF Economics and Strategy (data via Bank of Canada) UNITED STATES: The rose 0.1% in December after advancing 0.4% in November. The headline figure was negatively impacted by a -1.2% decline in energy prices. Food costs, for their part, rose 0.2% m/m. Excluding these two components, the CPI rose 0.3% m/m as higher prices for owners equivalent rent (+0.3%), medical care (+0.3%), and recreation (+0.1%) were only partially offset by lower prices for apparel (-0.5%) and transportation (-0.2%). On a year-on-year basis, the headline figure slid one tick to 2.1% while core inflation edged up one tenth of a percentage point to 1.8%. Looking ahead, we expect inflation to accelerate in 2018 on the back of above potential growth combined with the downward trend of the USD (note however that there is a negative base effect in the first two months of the year). rose 0.4% m/m in December after increasing an upwardly revised 0.9% in November (initially reported as 0.8%). Sales of motor vehicles and parts expanded 0.2% during the month. Excluding that category, retail sales also grew 0.4% thanks to decent showings for furniture stores (+0.6%), 60 50 40 30 20 10 0-10 -20-30 -40 % BoC survey s balance of opinion on investment and hiring Hiring Investment prompting firms to be more motivated to hire and invest. 2005 2010 2015 building materials (+1.2%), food/beverages (+0.5%) and nonstore retailers (+1.2%). Overall, sales increased in 9 of the 13 major categories surveyed. In real terms, retail sales were up 0.2% (using CPI as a proxy for retail prices). Looking at quarterly data, a strong labour market and consumer confidence flying high helped nominal sales rising at an astonishing annualized pace of 11.3% in Q4, the strongest since 2010. In real terms, it s running at 7.3% which bodes very well for consumption spending in the quarter. The dropped to 104.9 in December from November s reading of 107.5, the second highest in the survey s 44-year history. The percentage of firms expecting a better economy slid from 48% to a still elevated 37%. Similarly, the proportion of respondents expecting higher sales dropped from a 10-year high of 34% to 28%, which was nevertheless above the indicator s 6-month moving average. Meanwhile, the percentage of small firms that considered present economic conditions to be conducive to expansion remained unchanged at 27%, a cyclical high. The details of the report also showed that employment was becoming an obstacle to production growth. Indeed, no less than 54% of small firms stated that they could find few or no qualified applicants to fill their job vacancies, the highest ratio ever recorded. To mitigate this shortage, 23% of firms planned to enhance their net compensation plans in the near future. This is the highest percentage registered since March 2000. U.S.: NFIB report shows growing shortage of qualified workers % of firms having trouble finding qualified applicants vs. % planning to increase compensations 55 50 45 40 35 30 25 20 15 10 5 0 % -5 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 NBF Economics and Strategy (data via Datastream) Few or no qualified workers to fill job vacancies Planning to increase net compensation plans According to the (JOLTS), there were 5,879K positions waiting to be filled in the United States in November, 46K fewer than in October and 252K fewer than the all-time high posted in September. The November report showed hires fell 104K to 5,488K and separations retreat 49K to 5,202K. The quit rate (quits as a percentage of total employment) held steady at a cyclical high of 2.2%. All in all, the report continued to indicate high demand for workers despite the monthly drop in job openings. Still in November, registered its steepest monthly increase since December 2001, surging $28.0 billion 2
to an annualized $3,827.2 billion. Non-revolving credit grew $16.8 billion to $2,804.5 billion. Meanwhile, revolving credit, which consists mainly of credit card loans, expanded $11.2 billion to $1,022.7 billion, thereby clearing its pre-recession peak to reach a new all-time high. U.S.: Credit card loans reached all-time high in November Revolving credit outstanding. Last observation: November 2017 1,040 1,020 $, in billions, ann. Pre-recession peak construction (2.7 vs. 1.5). At the national level, economic confidence reached a cyclical high in France (114.2 vs. 111.9) and remained elevated in Germany (116.0 vs. 114.4), Italy (112.1, unchanged) and Spain (110.0 vs. 110.8). Eurozone: Economic confidence at 17-year high Economic Sentiment Indicator vs. Consumer Confidence Index. Last observation: December 2017 120 Index 115 110 Economic Sentiment (L) Index 8 4 0 1,000 105-4 980 100-8 960 940 95 90 Consumer Confidence (R) -12-16 920 85-20 900 80-24 880 75-28 860 70-32 840 820 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 NBF Economics and Strategy (data via Datastream) 65 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 NBF Economics and Strategy (data via Datastream) -36 WORLD: In the, the seasonally adjusted dipped one tick to 8.7% in November, its lowest level since January 2009. Nationally, the jobless rate slipped one-tenth of a percentage point in three countries: Germany (from 3.7% to a post-unification low of 3.6%), France (from 9.3% to a six-year low of 9.2%) and Italy (from 11.1% to a five-year low of 11.0%). In Spain, it stayed unchanged at 16.7%, the lowest figure in nine years. Meanwhile, youth unemployment in the single-currency area slipped two ticks to a still elevated 18.2%. Eurozone: Unemployment falls to 9-year low Headline unemployment rate vs. under-25 unemployment rate. Last observation: November 2017 26 24 % 22 20 Under-25 18 16 Pre-crisis low: 15.1% 14 12 10 Total 8 Pre-crisis low: 7.3% 6 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 NBF Economics and Strategy (data via Datastream) In December, the European Commission s rose for a seventh consecutive month, climbing 1.4 point to a 17-year high of 116.0. The gain was driven by higher confidence among consumers (index at a 16-year high of 0.5 vs. 0 the prior month) and in the manufacturing sector (9.1 vs. 8.1). Confidence also rose in the services segment (18.4 vs. 16.4) and the retail segment (6.2 vs. 4.3), not to mention 3
What We ll Be Watching In Canada, the highlight of the week will the central bank s. In light of the strong performance of the Canadian labour market in 2017 and given the lag in the effect of monetary policy on the economy and inflation, we think the data have moved outside the zone of inaction where the central bank can watch the incoming indicators without reacting to them. Considering our forecast of 2.5% for Canada s 2018 real GDP growth, we see four Bank of Canada rate hikes this year, with the first one occurring on Wednesday. In other news, may have rebounded strongly in November based on a marked increase in exports of factory goods during the month. We ll also keep an eye on the release of for December and for November. Previous NBF forecasts Bank of Canada overnight rate 1.00% 1.25% Manufacturing sales (November m/m chg.) -0.4% 2.4% Canada: A rate hike by the Bank of Canada is in the cards Bank of Canada overnight rate vs. Fed funds rate (mid-point) 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 % In the U.S, likely expanded further in December, buoyed by the manufacturing sector which continued to thrive according to the ISM manufacturing survey. A strong contribution from utilities is also expected, in line with colderthan-normal temperatures observed across the Northern regions of the country during the month. Overall, industrial production may have increased 0.8% m/m. We ll also get housing data for December, with a slight retreat expected for both and on account of a fading post-hurricane rebound. The first clues on the state of the manufacturing sector in December will be available with the publication of the. Finally, the latest edition of the will be released on Wednesday. Previous NBF forecasts Industrial production (December m/m chg.) 0.2% 0.8% Housing starts (December, saar) 1297K 1270K U.S.: Utilities may have boosted industrial production in December Industrial production 1.2 1.0 0.8 0.6 0.4 0.2 0.0-0.2-0.4 m/m % chg. 1.0 BoC overnight rate -0.6 0.5 Fed funds rate 0.0 2007M07 2009M01 2010M07 2012M01 2013M07 2015M01 2016M07 2018M01 NBF Economics and Strategy (data via Bloomberg) NBF Forecast -0.8 2014M06 2014M12 2015M06 2015M12 2016M06 2016M12 2017M06 2017M12 NBF Economics and Strategy (data via Datastream) NBF Forecast Elsewhere in the world, we ll get China s. Also, November s numbers will be released in the Eurozone. 4
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