Interesting News (July 24, 2013)

Globe and Mail:
Canada Shops, Economic Slowdown Fears Drop

July 24, 2013 | David Parkinson

What happened to Canada’s worrisome economic slowdown? It look like consumers were so busy shopping that they zoomed right by it.

Statistics Canada reported Tuesday that retail sales surged 1.9 per cent in May, the biggest monthly growth in more than three years. The figure trounced economists’ expectations for a 0.4-per-cent gain. The expected contribution from consumer spending to second-quarter gross domestic product growth has just taken a significant leap – no small thing, since household consumption of goods accounts for roughly a quarter of GDP.

The stores haven’t been the only place where the economy has shown impressive, and unexpected, strength. The labour market added an astounding 95,000 jobs in May – and held on to those gains in June, a feat many economists considered unlikely. Housing starts have rebounded into the 200,000 territory, a surprising show of strength in a sector that had been in full retreat since last fall and had been a significant drag on GDP growth. Wholesale trade surged 2.3 per cent in May. Manufacturing sales rose 0.7 per cent; new orders jumped 1.8 per cent.

This body of evidence is more than enough to suggest that economic forecasters had been too rash in ratcheting down their economic projections for the quarter – perhaps none more so than the Bank of Canada, whose GDP forecasts may have been too pessimistic for a second consecutive quarter.

In its quarterly Monetary Policy Report released last week, the central bank estimated annualized real GDP growth at about 1.0 per cent in the second quarter, down from 2.5 per cent in the first quarter.

But just as its first-quarter estimate (1.5 per cent) had proved far off the mark, its second-quarter target looks similarly low-ball. Most economists had already revised expectations up to around 1.5 per cent for the second quarter before last week’s wholesale and factory numbers and Tuesday’s retail data came out. Now, numbers closer to 2.0 per cent are being floated.

June looms as a big wild card for second-quarter GDP, however, chiefly because of the distorting impact of the Alberta floods. The extent of that impact is anyone’s guess. Some economists have estimated the flooding shaved as little as 0.1 percentage point off monthly growth, others have suggest 0.3 percentage points or more.

Regardless, the economy looks to have been in much better shape heading into June than many economists, including those at the Bank of Canada, had believed. And the distortions in the data from the floods will be transitory; anything lost in GDP in June will almost certainly result in rebounds in July or August. The economic momentum looks to have arrived ahead of schedule.

Does that change the Bank of Canada’s own schedule for eventual tightening of monetary policy? Probably not. After all, inflation – the single guiding determinant of the country’s monetary policy – remains at benign levels (though it, too, accelerated in June). But it does provide an increased comfort level in the central bank’s continued bias toward tightening, something that only a few weeks ago many observers – myself included – argued had outworn its welcome.


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