MNI BOC State of Play: More Job Gains But Exports Disappoint

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada had some data to be encouraged about on

the domestic front Friday but also something to be disappointed about on the

export front.

     Statistics Canada reported Friday that the Canadian economy added jobs for

the eighth consecutive month in July, when employment rose 10,900, led by

full-time positions which were up 35,100.

     The unemployment rate decreased to 6.3%, its lowest level since October

2008, although this was in large part due to the lower participation rate as

less people searched for a job.

     The number of hours worked rose 1.9% year-over-year, picking up from June,

when they were up 1.4%. And while average hourly wage growth was steady at an

unimpressive 1.3% year-over-year in July, average weekly wage growth accelerated

to 1.4% from 1.1%.

     Yet wage growth continues to show little upward pressure. Also on the

downside, all positions were self-employed as the number of employees was down

2,400, led by private-sector employment, which decreased 3,200 in July.

     Still, the employment report was overall positive considering the economy

has been constantly adding jobs for the past eight months, with a visible

rotation towards more full-time positions rather than part-time jobs.

     On the external front, data released Friday by Statistics Canada were far

less encouraging, with the deficit widening to C$3.6 billion in June from C$1.4

billion in May. The disappointment was reinforced by revisions for the worse in

May, April, and March, now all showing larger deficits than initially reported.

     The bad news was that weaker exports were responsible for the poor

performance, as they were down 4.3% on the month, with a 2.7% price drop only

part of the story. Volumes were indeed down 1.7%.

     While energy played a role, with exports down 9.2%, exports excluding

energy products were still down 3.4%.

     The reason is that declines were widespread: 9 of 11 categories recorded

lower exports.

     On the bright side, imports of industrial machinery, equipment and parts

rose 1.8%, a good sign for investment activity in Canada.

     In addition, June export weakness came on the back of three consecutive

months of solid gains.

     Besides, the Bank of Canada is already expecting GDP growth to lose some

steam in the third quarter. And even if the BOC insists on being data dependent,

it is unlikely to adjust its policy to just one month, especially considering

the volatility of trade data.

     Of note, June export weakness, including a 4.5% drop in exports to the

U.S., Canada's main trading partner, occurred amid renewed strengthening of the

Canadian dollar against the greenback since May, and a sustained appreciation of

the currency, or an acceleration of it, could eventually impact the bank's

judgment on the impact not only on exports, but also on inflation.

     For now, however, given the growth slowdown already factored in for the

third quarter, the decrease in exports coming after three months of gains is

unlikely to worry the BOC, leaving a fall rate hike on the table.

     Yet the central bank has also said it will carefully gauge the impact of

higher rates on the economy, making a gradual rate increase more likely than

not.

     On that front, housing and debt-related trends also remain on the radar.

While federal and provincial measures are expected to cool down the housing

market in the Toronto region, the BOC is not projecting any housing crash.

     Still, the Toronto Real Estate Board announced Thursday that home resales

in Toronto plunged 40.4% in July year-over-year.

     However, the TREB said the drop "had more to do with psychology, with

would-be home buyers on the sidelines waiting to see how market conditions

evolve."

     "As we move through the fall, we should start to get a better sense of the

impacts of the Fair Housing Plan and higher borrowing costs," it added.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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