Canada: GDP is forecast to increase by 0.4% m/m in January - TDS

Analysts at TDS explain that Canada’s industry-level real GDP is forecast to increase by 0.4% m/m in January following a sweep of broadly upbeat activity data.

Key Quotes

“Economic performance is expected to be fairly balanced between goods and services producing industries, though the risks are tilted towards an outperformance on the services side. The goods sector should benefit from a healthy gain in manufacturing output and the continuing recovery in resources, though we expect a pullback in utilities due to unseasonably warm weather. Services output should see a healthy contribution from the retail industry following the sharp increase in real retail sales while the momentum in the housing market should support FIRE (finance, insurance, real estate) industries as well as residential construction for the goods sector.”

“Although the dynamics of monthly GDP and the strength of recent advanced indicators are currently suggesting a strong Q1 print near 3%, slightly above the BoC's 2.5% forecast, the extent to which economic slack is eliminated earlier than our forecast for a 18Q3 closure is uncertain. While the mix in the drivers of growth remains unfavourable to the medium-term outlook because of the unsustainable contribution from consumers and lack of business investment, a key downside risk of this demand shock is how it impacts the dynamics of business inventories and imports. For instance a lack of conviction by businesses may lead to further inventory depletion while some of the consumer demand may be satisfied through higher imports, which would then be a drag to GDP at market prices in 17H1. Lastly, as highlighted by Poloz's latest speech, some of the recent strength in consumer expenditures may be more transitory as fiscal transfers (child benefits) caused a blip in disposable income.”

“Foreign Exchange

A better-than-expected growth print for January could help fuel further consolidation in USDCAD. The greenback has been mixed this week with US fiscal, month-end rebalancing and Fed sending conflicting signals. For USDCAD, it has lurched lower over the past week as oil prices have recovered a bit and the pullback in the USD has helped the recovery in the majors. A healthy report that shows growth running ahead of the BoC's expectations will likely fuel this downward momentum in USDCAD, but we also note that there is strong technical resistance below 1.33. A break below 1.3250 is probably needed to get some of the rules following investors on board, but we also note that the Trump administration is likely to begin discussions on renegotiating NAFTA in the coming weeks. That keeps us looking for better levels to re-engage in fresh exposure to long USDCAD.”