A pair of key Canadian economic indicators Friday showed strong employment growth and the first trade surplus in nearly two years, but some discouraging details within the reports provided further evidence that the economy lost momentum in the third quarter.
Statistics Canada reported a merchandise trade surplus of $526-million for August, an improvement from the revised $189-million deficit posted in July. It marks the first time since December, 2016, that the balance has been in positive territory, extending the remarkable upswing in Canada’s trade fortunes after hitting a record deficit of $4-billion in March.
At the same time, the statistical agency’s monthly labour force survey showed employment grew by 63,000 jobs in September, lowering the unemployment rate to 5.9 per cent from 6 per cent in August. The gains more than reversed August’s 52,000-job decline.
But while the headline numbers in both reports were impressive and considerably better than forecasters had anticipated, the details painted a less rosy picture.
The trade surplus came despite declining exports, as imports were even weaker – indicating a slowdown in demand on both sides of the trade equation. On the labour front, the job growth came entirely in part-time work, while wage growth slowed in September.
“The headline surprises … likely overstate the positives for the economy, given the underlying details,” Canadian Imperial Bank of Commerce economist Royce Mendes said in a research note.
Statscan reported that exports fell 1.1 per cent in August, led by a downturn in auto-sector shipments after a surge in July. But imports were even weaker, down 2.5 per cent amid declining consumer-product shipments.
In volume terms, removing the impact of price changes, imports were down 1.5 per cent in August, while exports fell 0.7 per cent.
“The balance improved, but not for the reasons you’d typically want to see,” Bank of Montreal senior economist Robert Kavcic said in a note.
National Bank of Canada economists Matthieu Arseneau and Jocelyn Paquet said the slump in consumer-goods imports – down 3.6 per cent by volume – was “an indication that demand may be slowing in the country.” They said the slowdown “is consistent” with expectations that economic growth moderated in the third quarter, after the strong 2.9-per-cent annualized pace in the second quarter. Most economists expect third-quarter growth to come in at something close to 2 per cent.
On the labour front, part-time employment surged by 80,000 in September, which was largely a reverse of August’s 92,000-job slump in part-time work. But full-time employment in September was down 17,000, giving back part of August’s 40,000-job gain.
Meanwhile, hourly wage growth among permanent employees – a key barometer for both inflationary pressures and consumer spending – slowed to 2.2 per cent year over year in September, from 2.6 per cent in August. It was the fourth consecutive month the rate of wage growth has slowed.
It’s been an up-and-down 2018 for the labour market, with occasionally dramatic month-to-month swings in the labour force survey, but little overall growth after a strong 2017. For the year to date, average monthly employment growth has been a tepid 5,400 jobs. The unemployment rate, after falling more than a full percentage point last year to a 10-year low, has held largely steady since last November. Full-time employment has shown almost no growth over the past six months.
With the economy nearing the peak of the current business cycle – running at close to full productive capacity and approaching full employment – the slowdown in job growth isn’t surprising. But the survey’s evidence of stalling of wage growth in the past few months has been harder for economists to explain. The further tightening of labour markets should be accelerating wage inflation as employers compete for a shrinking pool of skilled workers.
“Slow wage growth is a puzzle – labour demand remains healthy and surveys (and our own discussions with businesses) point to growing job shortages, yet pay growth has been slow to follow,” Royal Bank of Canada senior economist Josh Nye said in a research report.
Mr. Nye argued the moderating wage growth could help persuade the Bank of Canada to maintain its gradual pace on interest-rate increases, as inflation is the primary focus of the central bank in determining rate policy. This despite the agreement on a tentative U.S.-Mexico-Canada trade pact earlier this week, which removed perhaps the biggest uncertainty hanging over the outlook for further Canadian rate hikes.
“We expect a hike at the BoC’s meeting later this month, with a decent (and more balanced) growth backdrop arguing for less monetary policy accommodation. But we think that will be their last move this year,” Mr. Nye said. “Until we see evidence of wages and inflation responding more significantly to capacity constraints, the BoC has little reason to speed up the pace of tightening.”
David Parkinson