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For Canada, Tougher Sledding in 2013, but Keep the Faith

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At the outset of this new year, it appears the U.S. has avoided its fiscal cliff, sort of.

At the outset of this new year, it appears the U.S. has avoided its fiscal cliff, sort of.

Finally, there has been agreement on some tax increases. The issue of spending cuts, however, has been shifted down the road, as has the matter of the debt ceiling.

The $16.4 trillion debt ceiling is currently being tested and will come to a head in February. The bipartisan approach that resulted in a successful resolution of the higher-taxes-for-the-wealthy debate will extend only so far. The Republicans and Democrats are still far apart in their philosophical stances.

Washington’s financing problems will likely continue to dominate the headlines throughout this year.

Nevertheless, the immediate news is positive. Extended unemployment benefits will help consumer spending, as will keeping tax rates the same for 98% of the nation’s citizens.

Some reduction to “real” (i.e., inflation-adjusted) U.S. gross domestic product (GDP) growth will come from the higher taxes on the affluent and the end of the payroll tax deduction. These won’t be enough to blunt most of the economic momentum that has built up south of the border.

The U.S. jobs market is on the upswing. The unemployment rate in November declined again to 7.7% and there were 146,000 net new jobs created.

U.S. initial jobless claims have fallen into a range of 340,000 to 360,000 over the past several weeks, indicating ongoing strength in labor demand.

The improvement in U.S. housing starts is beginning to contribute significantly to overall economic activity. And recently strong residential building permit levels indicate that homebuilding is on a definite upward trend.

Perhaps the best news emanating from the U.S. relates to energy. Oil and gas production is reaching an all-time high. An energy boom is underway. Not only is this helping to keep fuel costs under control, but it is a stimulus to investment across the manufacturing sector, with petrochemical and steel plants in the forefront.

The reason to go on at such length about the U.S. economy is to set the scene for Canada’s economic prospects in 2013.

The latest official numbers from Statistics Canada indicate the nation’s output has been on hold for the past several months. Industry-based GDP growth in November was +0.1% month over month after being flat in October and -0.1% in September.   

Canada has acquired a reputation for good economic management thanks to the relatively healthy manner in which we survived the recession. Lately, however, circumstances have not been as fortuitous.

Commodity prices have languished as China’s advance has decelerated along with the weaker performance of its number one customer, Europe.  

Canadian export sales, especially in the critical energy area, have been negatively impacted by the U.S. surge in its own domestic supplies.

The debt level of Canadians remains near an all-time high. As efforts are made to rein in those excessive financial obligations, there will be an impact on retail sales.

And housing starts, which stayed remarkably high in Canada in 2012, are headed for a downturn. In the latest month (November), Canadian residential groundbreakings dropped below 200,000 units, seasonally adjusted and annualized, for the first time in a year. They maxed out last year at 251,802 units in May.

The bloom has also come off the resale market, where sales are showing signs of faltering and year-over-year prices in several major urban centres are declining.

All the same, there are significant props for the Canadian economy. November’s labour market report from Statistics Canada recorded a 59,000 net job increase in the month, with most of it coming in the important “full-time” category.

Canada’s unemployment rate in the latest month fell 0.2 percentage points from 7.4% in October to 7.2% in November.

Canadian consumers are getting a break on prices. Canada’s all-items Consumer Price Index (CPI) in November was only +0.8% year over year, a decline from October’s +1.2%. The latest inflation rate was the lowest since October 2009.

The CPI’s energy sub-component price index was -0.2% year over year, while gasoline was only +0.4%.

The auto sector is performing well. The motor vehicle and parts dealers sub-segment stood out among the latest retail sales numbers, increasing 2.8% year over year while the overall shopkeepers’ sales gain was a tepid 1.7%. New car dealer sales were +4.4% year over year.

For our nation, a major redeeming feature will be the external climate. Particularly positive will be the continuing improvement in the U.S. economy, while at the same time Europe’s debt issues – keeping our fingers crossed – appear to be receding.

The latest reading on China’s manufacturing output recorded a positive increase for the third month in a row.

Finally, as is the case almost everywhere, there is the very stimulatory monetary framework. For however much longer it lasts, the interest rate environment is likely to never be as low again.

In Canada, we should be prepared for some tougher sledding in 2013. Let’s try to keep the faith nonetheless. There are many reasons to expect we’ll come through the year in fairly good shape, with 2014 offering even better prospects.

by Alex Carrick

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