Canadian economic stagnation in 2019 Q4
On Friday, Statistics Canada will publish its monthly real GDP by industry estimate and the quarterly national accounts. For the month of December, we forecast a 0.2% month-over-month increase in real GDP due to the end of the CN strike in late November and steady expansion in other services-oriented industries. This 0.2-ppts uptick is modest considering that the Canadian economy has failed to expand on a cumulative basis during the previous two months.
For the entire fourth quarter of 2019, real GDP likely stalled (+0.2% Q/Q SAAR) as negative forces fully offset positive ones. For instance, the 5.5% pullback in goods exports caused by the rail strike, the temporary shutdown of the Keystone pipeline and the permanent closure of the Oshawa automotive plant dragged 1.4 ppts on real GDP, according to our calculations. Also, businesses reduced their inventory level for the first time in four years.
Among the positive contributors to real GDP growth, business investment in M&E edged moderately higher in 2019 Q4. Housing activity, measured by the residential investment GDP component, likely added 0.2 ppts to economic activity during the quarter. Housing activity rose at a brisk pace for the third consecutive quarter in 2019 Q4, thanks to the robust increase in MLS residential transactions on the resale market.
… and in 2020 Q1?
The Canadian economy was able to catch a brief break in January, leading us to forecast a small 0.1% m/m real GDP gain. This reprieve turned out to be short-lived given the unexpected rail disruption and the coronavirus outbreak. According to our preliminary estimates, the blockades and the virus will shave 0.3 ppts from Canadian real GDP in February.
First, the shutdown of large sections of the Canadian rail system following First Nations protests and blockades will create a moderate drag on economic activity. On Feb. 6, a critical railway line in Ontario was blocked by First Nations protesters. On Feb. 13, the Canadian National rail company halted its operations in Eastern Canada due to several blockades along its routes. Operations at the Canadian Pacific Company, Via Rail and regional public transits were also disrupted. As of writing, some blockades have been lifted, new ones have emerged.
Second, the negative impact of the coronavirus on the Canadian economy could turn out to be larger than the rail disruption. Canadian exports to China as well as tourism are principally dragging down real GDP right now, while lower commodity prices are weighing down on incomes and the GDP deflator. We currently track a 0.2% month-over-month contraction in Canadian real GDP for the month of February due to lower output in several industries, including mining, manufacturing, forestry, transportation and accommodation. In addition, the teachers’ strike in Ontario will act as a small drag on educational services during the month. At best, we can count on a partial rebound in economic activity in March. A V-shaped recovery in March appears unlikely due to the long-lasting effects on consumer/business confidence and structural disruptions in the global supply chain. Thus, Canadian real GDP growth could turn out to be flat for a second consecutive quarter in 2020 Q1. Under the less adverse scenario where the rail disruption and coronavirus turn out to be temporary shocks, we would look for only a 0.1ppt downward revision to Canadian real GDP growth for 2020, from 1.5% to 1.4%.
This being said, the coronavirus spread could lead us to revise down quickly our Canadian 2020 annual forecasts if the outbreak is not contained globally. This risk is unambiguously titled on the downside. The coronavirus is hammering other regions of the world. Social and economic activities in Northern Italy are completely shut down, which could be enough to bring parts of Western Europe in an outright but hopefully short-lived economic contraction. In the U.S., the Centers for Disease Control and Prevention said today “it’s important to note that current global circumstances suggest it is likely that this virus will cause a pandemic,” implying more second-order negative effects and net losses in services activities. The U.S. Services Business Activity Index indicated a contraction in January 2020 for the first time in four years and a more significant decline likely occurred already in February.
BoC Rate Cut? The Jury is Still Out
The Bank of Canada will definitively have to reduce its January MPR real GDP growth forecast of 1.3% (Q/Q SAAR) for 2020 Q1. However, we are not comfortable saying that the nature of the on-going disruption will be enough to tilt the balance in favour of an “insurance cut” within the BoC Council at the March 4 meeting. A more severe coronavirus scenario with larger and longer economic consequences could be necessary to bring the BoC in a rate-cutting mode.