Donald Trump may eventually wreck the Canadian economy, but not before he gives us a chance to enjoy at least one more rush from a blast of unsustainably fast economic growth.
Canada’s gross domestic product increased 0.5 per cent in May from April, the most in a year, as 19 of the 20 industries surveyed by Statistics Canada increased output. One should avoid making too much of monthly data, but it’s rare for growth to spread so broadly. StatCan has recorded increases in all but one of its monthly GDP categories only three times in the last two decades, and the average over that period was 13, according to Bloomberg News.
Those of you who have been obsessing over the U.S. president’s tweets, or spending too much time with the business pages, will be thinking, “Fake News!” And fair enough. Few of the professionals on Bay Street or Wall Street saw an economic pop of that size coming.
There also is reason to be wary of statistical noise. The April numbers implied the economy was weaker than it actually was because exceptionally poor weather depressed consumer spending. StatCan warned that some of May’s strength was the result of the weather turning warm enough and dry enough for shoppers to go outside. The value of retail trade increased 2 per cent, pay back for a decline of 1 per cent in April.
Still, the data validate the Bank of Canada’s decision to raise interest rates in July.
The central bank looked through the negative headlines and saw evidence that the Canadian economy was starting to roll. It was the right call. Derek Holt, an economist at Bank of Nova Scotia, now thinks GDP could grow at an annual rate of 3 per cent in the second quarter, compared to the central bank’s current estimate of 2.8 per cent.
A pleasant surprise of that magnitude likely would prompt the Bank of Canada to raise interest rates again this year to ensure it stays ahead of inflation. Holt told his clients in a note that they should be ready for an increase in September at the next scheduled announcement date.
Prices for assets linked to short-term interest rates put the highest odds on an October increase, perhaps because Stephen Poloz, the Bank of Canada’s governor, has promised “gradual” changes in policy. Regardless, the safe money now is a benchmark rate of at least 1.75 per cent by the time the snow flies.
“Markets are trading volatile tweets, not fundamentals,” Holt said. “One has to tailor monetary policy to the hand that is being dealt by an economy that is performing well and much better than the doomsayers had thought.”
The GDP numbers further complicate Conservative Leader Andrew Scheer’s contention that Prime Minister Justin Trudeau is running the economy into the ground.
Scheer, like so many others, got caught up in the negative headwinds that Trump has whipped up around trade and competitiveness. Those are serious and there is lots to criticize about the federal government’s response. Unfortunately for the Opposition leader, Trump also is responsible for some significant tailwinds that will make it easy for the prime minister to deflect any criticism of his handling of the economy this autumn.
Canada is benefiting from surging U.S. demand and stronger energy prices. The later is linked to the former and the former has a great deal to do with Trump’s tax cuts, which have a prompted a burst of business and consumer spending. The American economy expanded at an annual rate of 4.1 per cent in the second quarter, the fastest in four years.
Output by StatCan’s extraction category, which includes oil and gas, jumped 1.8 per cent in May from the previous month and has been generally strong all year. Industries associated with exporting, such as transportation and warehousing and manufacturing, also posted gains. Companies in the information-and-communications-technology space recorded a combined increase of 0.7 per cent, yet another strong result that raises questions about why automobiles and agriculture get all the attention at Canada’s trade talks.
An escalation of the trade wars likely would upend Canada’s economic rebound. Tariffs would weigh on demand and some exporters would struggle to compete if margins narrowed. Higher prices for goods and services also could force the Bank of Canada to raise interest rates in order to keep inflation in check.
The sugar high of Trump’s fiscal stimulus also will wane eventually.
But for now, the rules of economic gravity are setting up Canada for another good year.