MNI BOC State of Play: NAFTA Threat Vs Tighter Labor Market

By Yali N'Diaye

     OTTAWA (MNI) - While statistics since the December monetary policy meeting

have provided further evidence of the diminishing slack in the Canadian labor

market amid growing business confidence, renewed concerns this week over the

U.S. pulling out of NAFTA reminded that global uncertainties are more likely

than not to continue to keep the Bank of Canada on the "cautious" side. 

     However, Governor Stephen Poloz has clarified that "cautious" did not mean

still.

     The question is whether the ongoing improvement in the labor market and

rising underlying inflation will outweigh the global uncertainties, especially

related to NAFTA, that were deemed "considerable" in the December policy

statement.

     --NAFTA DRAMA 

     Developments around NAFTA this week have been dramatic, reminding the need

to not be complacent about the risk of a U.S. exit from the three-country

agreement.

     Media reports Wednesday indicated that Canadian officials were more and

more convinced that the U.S. would pull out of NAFTA. Thursday, Canada Foreign

Affairs Minister Chrystia Freeland even said Canada was "prepared for every

eventuality."

     However, in an interview with the Wall Street Journal Thursday, while U.S.

President Donald Trump repeated he would terminate NAFTA if a "fair" deal was

not reached for the U.S., he said he "would rather be able to negotiate." He

added, "we have a chance of making a reasonable deal."

     On the timing, Trump also showed some flexibility. 

     The sixth round of negotiations will take place in Montreal, Quebec,

January 23-28, with talks expected to continue through the end of March, so that

they would end prior to Mexican presidential elections in July.

     However, Trump said in the WSJ interview that "There's no rush." 

     Such remarks were welcomed by Freeland as "constructive".

     --LIMITED SLACK

     The whole episode this week showed NAFTA clearly remains a significant

risk, which Canadian firms acknowledged in the BOC's winter Business Outlook

Survey conducted November 14 through December 8, and published January 8.

     Businesses are indeed "increasingly concerned" about NAFTA renegotiations,

the survey said. Nonetheless, their views of the U.S. economy strengthened,

partly as a result of the U.S. tax reform, which will also be one less

uncertainty for the BOC now that it has been signed into law.

     Most importantly, the central bank concluded in its survey that economic

slack was just limited to energy-producing regions.

     That leaves wages as a central data point, and on that front, the recent

trend has been indicative of tighter labor market conditions.

     In the December 6 statement, the BOC said, "despite rising employment and

participation rates, other indicators point to ongoing - albeit diminishing -

slack in the labor market."

     At the time, the unemployment rate stood at 5.9%, the lowest since February

2008, and employment had risen by 79,500 in November, the largest increase since

April 2012. Average hourly wages for permanent workers were up 2.7%

year-over-year, the largest gain since April 2016, confirming the rising trend

that started last May.

     Since then, the picture has brightened further, with the unemployment rate

falling to 5.7% in December, the lowest on record, while wage growth picked up

to 2.9%.

     --SLOWING HOUSING

     Meanwhile, the housing sector has continued to slow, a shift the central

bank wants to see, as long as it is not collapsing.

     Such slowdown is expected by the BOC. So as the central bank continues to

watch the sensibility of the economy to its rate hikes in light of elevated

household debt, the most recent housing developments are unlikely to be an

obstacle to a tightening.

     And now that Trump has indicated NAFTA negotiations could last beyond

March, if the central bank wanted to wait until April 18 before acting so that

negotiations would be over, the latest Trump's comments just weakened such

argument.

     But then again, Trump's rhetoric has proven particularly volatile.

     The BOC left its overnight rate target unchanged at 1.0% in December, and

will make its next announcement next Wednesday.

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

[TOPICS: M$C$$$]