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Canada’s economy appears to be cooling despite above normal temperatures

Canada’s economy appears to be cooling despite above normal temperatures

Crossing the threshold into 2016, the best way to describe the mood of Canadian consumers seems to be “deteriorating”. This observation is based on two recent measures of consumer confidence that are sending quite different signals.

First, following a gain of 6.3% in October, the Conference Board of Canada’s Index of Consumer Confidence posted a gain of 9.8% in November. This increase took the index to 87.7, its highest print since March of 2015.

According to the Conference Board, consumers were, on balance,more positive about the state of their current finances and their future job prospects, as well as their future finances. Also, the net percentage of respondents who planned to make a major purchase moved higher for the second consecutive month.

From a regional perspective, consumers were more upbeat right across the county. Having said this, it should be noted that despite a five point increase in the month, the first since June of 2016, the index of consumer confidence in Alberta remains below year-ago levels.

Although, as noted above, consumer confidence strengthened in November, there is evidence that it weakened in December. This deterioration is reflected by the Bloomberg Nanos Canadian Confidence Index which has trended steadily lower, from a 13-month high of 58.6 in mid-November of 2015, to a 12-month low of 53.8 at the end of December 2015.

According to Bloomberg, this softening of consumers’expectations was fuelled by heightened concerns about their financial health,their future job prospects, the increased risk of a price correction in the housing market and the significant loss of wealth stemming from the protracted weakness in stock prices.

Bloomberg reported that consumers in all five major regions have become less optimistic about their near-term prospects, with the most significant deterioration occurring in the Prairies, driven not surprisingly by the impact of lower oil prices on energy production and investment in the region.

The weakening outlook for consumer spending painted by the Bloomberg-Nanos Confidence Index is darkened by declines in two recently released forward-looking indicators of economic activity.

First, the Canadian Federation of Independent Business (CFIB) Business Barometer tumbled from 58.7 in November to 55.7 in December, its lowest print since the 2008-09 financial crisis.

According to the CFIB, small business optimism contracted sharply in Ontario and Alberta; it was also down in Manitoba and British Columbia. These declines more than offset an improvement in Nova Scotia,Newfoundland and Labrador, New Brunswick and Quebec. Second, the Royal Bank of Canada’s Manufacturing PMI declined from 48.6 to 47.5 in December due in large part to weakness in domestic demand which more than offset a moderate strengthening in PMI’s Export Order Index.

In December, the drop in the aggregate PMI was driven by weakness in all five key components of the PMI led by the New Orders Index and followed by the Output Index, the Employment Index, the Supplier Delivery Index and the Stock of Purchases Index, which measures pre-production inventories.

From our perspective, the sharp deterioration in consumer confidence late in 2015, plus the accompanying weakness in small business confidence and manufacturing production, will severely dampen growth prospects in the first quarter and likely weigh on the economy’s performance for the entire year.


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