April 2018 UNEMPLOYMENT RATE LOWEST SINCE … 2010. Retail sales ... Much of a big 7% drop in oil sands ... left US and global equity benchmarks lower for a second consecutive month

FURTHER SIGNS OF FIRMING IN CANADIAN WAGE GROWTH

DIVERGENCE RE-EMERGENCE

US ECONOMY SLOWED LESS THAN EXPECTED IN Q1

CANADA’S ECONOMY REBOUNDED IN FEBRUARY

HOME RESALES STABILIZE IN CENTRAL CANADA IN MARCH

May 2018

ECONOSCOPE, © ROYAL BANK OF CANADA

IN BRIEF

Volume 42, Number 5

May 2018

RBC ECONOMICS

RESEARCH

Craig Wright SENIOR VICE PRESIDENT &

CHIEF ECONOMIST

Dawn Desjardins

VICE PRESIDENT &

DEPUTY CHIEF ECONOMIST

Paul Ferley ASSISTANT CHIEF ECONOMIST

MACROECONOMICS

Robert Hogue SENIOR ECONOMIST

REGIONAL ECONOMIES

Nathan Janzen SENIOR ECONOMIST

MACROECONOMICS

Josh Nye ECONOMIST

FINANCIAL MARKETS & MACROE-CONOMICS

Gerard Walsh ECONOMIST

SECTOR ANALYSIS & PROVIN-CIAL ECONOMIES

Joseph Allegritti RESEARCH ASSOCIATE

Rannella Billy-Ochieng’

ECONOMIST

EDITOR

Brian Waterman

[email protected]

SUBSCRIPTION INFORMATION

[email protected]

Highlights This Month

3 FURTHER SIGNS OF FIRMING IN CANADIAN WAGE GROWTH

April employment ticked slightly lower but the unemployment rate

held at a very low 5.8% rate.

6 DIVERGENCE RE-EMERGENCE

The theme of policy divergence between the Federal Reserve and

its G10 counterparts took a backseat last year amid an upswing in

global growth that had a number of other central banks raising rates,

or at least contemplating an end to years of extraordinary stimulus.

7 US ECONOMY SLOWED LESS THAN EXPECTED IN Q1

The US economy’s Q1 slowdown wasn’t as significant as feared

with GDP posting a 2.3% annualized increase to start the year.

9 CANADA’S ECONOMY REBOUNDED IN FEBRUARY

The rebound in Canadian GDP in February was even stronger than

expected with a 0.4% increase easily erasing January’s disappoint-

ing 0.1% decline.

13 HOME RESALES STABILIZE IN CENTRAL CANADA IN MARCH

Existing home sales eked out their first monthly increase in three

months across Canada in March, rising 1.3% from February. This

came on the heels of a significant drop of more than 19% in the pre-

vious two months.

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CURRENT TRENDS Paul Ferley, Nathan Janzen, Josh Nye

HIGHLIGHTS

▲ Canadian GDP bounced back in February rising 0.4% which more than retraced the disappointing, and unex-pected, 0.1% decline in January.

▲ April employment ticked slightly lower but the unemployment rate held at a very low 5.8% rate.

▲ Nominal retail sales rose 0.4% in February which represented a im-provement from a downwardly revised gain of only 0.1% in January (0.3% previously).

▲ Housing starts fell to a nine-month low of 214k annualized units in April.

▲ Canada’s nominal trade deficit wid-ened to an eye-catching -$4.14 billion in March — marking a new record high and up from the -$2.9 billion shortfall in February.

▲ Year-over-year headline CPI growth rose to 2.3% from 2.2% in February — although that was below market ex-pectations for a 2.4% gain.

CANADIAN FEBRUARY GDP REBOUNDS MORE

THAN EXPECTED

LATEST AVAILABLE: FEBRUARY

RELEASE DATE: May 1, 2018

Canadian GDP bounced back in February rising 0.4% which more

than retraced the disappointing, and unexpected, 0.1% decline in

January. The earlier weakness was relatively narrowly based with

oil & gas extraction plummeting due to some temporary production

shutdowns that reversed strongly in February. The average level

of activity in February and January is consistent with annualized

Q1 GDP growth of 1.8% which is in line with the Bank of Canada’s

recently upwardly revised view of long-run average or potential

growth rate of the Canadian economy. The gain was led by a

3.0% jump in oil and gas extraction with manufacturing up 1.0%.

Output of services rose a more modest 0.1% though this was up

from flat output in January.

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

2012 2013 2014 2015 2016 2017 2018

Real GDP % change, month-over-month

Source: Statistics Canada


FURTHER SIGNS OF FIRMING IN CANADIAN

WAGE GROWTH IN APRIL

LATEST AVAILABLE: APRIL

RELEASE DATE: MAY 11, 2018

April employment ticked slightly lower but the unemploy-

ment rate held at a very low 5.8% rate. Full-time jobs

jumped 29k after a 68k March gain. Part-time jobs fell 30k

in April. The unemployment rate was 5.8% in April for a

third straight month. The 5.8% average in Q1 was the low-

est since the mid-1970s. Wage growth accelerated to 3.6%

year-over-year — 3.1% excluding Ontario where minimum

wages rose appreciably in January 2018.

CANADIAN RETAIL SALES RISE 0.4% IN FEB-

RUARY

LATEST AVAILABLE: FEBRUARY

RELEASE DATE: APRIL 20, 2018

Nominal retail sales rose 0.4% in February which repre-

sented a improvement from a downwardly revised gain of

only 0.1% in January (0.3% previously). This rebound in

large part reflected a recovery in auto sales of 1.9% after a

disappointing drop in January. Excluding this component,

sales were disappointingly flat with declines in a number of

key components including clothing (-1.4%), furniture (-

2.0%) and, unexpectedly, gasoline stations (-0.9%). Elimi-

nating the impact of higher prices, the volume of retail sales

rose 0.3% in February. This more than reversed the 0.2%

drop in January.

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Unemployment rate% of labour force


-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2012 2013 2014 2015 2016 2017 2018

Retail sales% change, month-over-month



CANADIAN HOUSING STARTS SLOWED IN

APRIL BUT REMAIN WELL ABOVE 200K

LATEST AVAILABLE: APRIL


Housing starts fell to a nine-month low of 214k annual-

ized units in April. That is 10k below the Q1 average

but still represents a solid pace of homebuilding relative

to underlying demographic demand. Single and multi-

unit urban housing starts both declined in April. The

pullback was led by BC and Ontario, with the latter con-

tinuing to come off of a multi-year high in February.

Housing starts picked up in Quebec, hitting their sec-

ond-highest level in six years. The year-to-date pace of

222k is up slightly from 220k this time last year. That

contrasts with a 13% year-over-year decline in home

resales in Q1.

CANADA’S TRADE DEFICIT HIT NEW REC-

ORD IN MARCH AS IMPORTS SURGED

LATEST AVAILABLE: MARCH


Canada’s nominal trade deficit widened to an eye-

catching -$4.14 billion in March — marking a new rec-

ord high and up from the -$2.9 billion shortfall in Febru-

ary. Exports were up 3.7% overall and 3.1% excluding

a large 14.7% bounce-back in agriculture exports after

a plunge in February that was likely tied to rail transpor-

tation backlogs in western Canada. Imports surged

6.0% — and, in a positive sign for Canadian business

investment, included higher imports of machinery and

equipment.

100

120

140

160

180

200

220

240

260

280

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Housing startsThousands

Source: Canadian Mortgage and Housing Corporation

300

350

400

450

500

550

600

650

2010 2011 2012 2013 2014 2015 2016 2017 2018

Exports

Imports

Merchandise tradeC$ billions, annualized



CANADIAN UNDERLYING INFLATION TRENDS

STILL GENERALLY FIRM IN MARCH

LATEST AVAILABLE: MARCH

RELEASE DATE: APRIL 20, 2018

Year-over-year headline CPI growth rose to 2.3% from

2.2% in February — although that was below market expec-

tations for a 2.4% gain. Ex-food & energy price growth

strengthened to 1.9% from 1.8% on a year-over-year basis.

The Bank of Canada’s preferred ‘core’ measures held at a

2.0% average in March although CPI-trim ticked down to

2.0% from 2.1% in February.

-2

-1

0

1

2

3

4

5

2012 2013 2014 2015 2016 2017 2018

Consumer price index% change, year-over-year


Lastest

month

Previous

month

Year

ago

Real GDP Feb 0.4 3.0

Industrial production Feb 1.4 4.5

Employment Apr 0.0 1.5

Unemployment rate* Apr 5.8 6.4

Manufacturing

Production Feb 1.0 4.9

Employment Apr 0.0 2.1

Shipments Feb 1.9 4.6

New orders Feb 5.0 8.1

Inventories Feb 1.3 7.3

Retail sales Feb 0.4 3.5

Car sales Feb -2.2 2.3

Housing starts (000s)* Apr 214.4 213.5

Exports Mar 3.7 1.9

Imports Mar 6.0 9.2

Trade balance ($billlions)* Mar -4.1 -0.7

Consumer prices Mar 0.3 2.3

* Levels are shown for the latest period and the same period a year earlier.

Source: Statistics Canada, RBC Economics Research

% change from:

ECONOMY AT A GLANCE


The theme of policy divergence

between the Federal Reserve and

its G10 counterparts took a

backseat last year amid an up-

swing in global growth that had a

number of other central banks

raising rates, or at least contem-

plating an end to years of extraor-

dinary stimulus. But the diver-

gence narrative made a bit of a

comeback in April with help from

some dovish central bankers. The

Bank of Canada, having more or

less kept up with the Fed by rais-

ing rates three times over the past year, appears reluctant to continue that trend amid concerns about US trade

policy and competitiveness challenges. We still think the data makes the case for less accommodation, but the

BoC’s extra dose of caution prompted us to remove one of the rate hikes from our forecast this year. Expectations

for the Bank of England have also shifted after Governor Carney indicated the upcoming meeting isn’t the only

opportunity to raise interest rates. A surprisingly soft Q1 GDP report didn’t help the case for a near-term hike. Our

forecast still assumes the BoE will raise rates on May 10, but the decision looks like a close call.

Those developments contrast with a Fed tightening cycle that appears to be in cruise control. Rising inflation, bet-

ter-than-expected GDP growth, and plenty of fiscal stimulus are finally convincing policymakers—and investors—

that a total of three rate hikes might not be enough this year. A higher inflation premium and anticipated increase

in borrowing requirements also helped drive 10-year Treasury yields temporarily above 3% for the first time in four

years. More attractive interest rates had investors buying the US dollar with the greenback erasing its year-to-

date losses in April. With the BoC not keeping pace with the Fed’s tightening cycle, we see a slightly weaker Ca-

nadian dollar persisting this year.

DIVERGENCE RE-EMERGENCE

FINANCIAL MARKETS

Josh Nye

“The Bank of Canada, having more or less kept up with the

Fed by raising rates three times over the past year, appears

reluctant to continue that trend amid concerns about US

trade policy and competitiveness challenges.”


FINANCIAL MARKETS

The US economy’s Q1 slowdown wasn’t

as significant as feared with GDP post-

ing a 2.3% annualized increase to start

the year. That is down from the recent

3% pace, but in a quarter that has been

plagued by seasonal adjustment issues,

still represents the fastest Q1 increase

in three years. Those seasonal quirks

were evident in consumer spending,

with the weakest gain in nearly five

years in part reflecting a change in the

timing of tax refunds for some house-

holds that has shifted spending pat-

terns. But that slowdown was partially

offset by another broadly-based in-

crease in business investment, including

inventories. And net trade provided a

surprising add to growth thanks to a

sizeable narrowing in the trade deficit

late in the quarter. So even without

much support from the household sector, GDP still came in 1/2 percentage point above its longer run growth rate.

March’s personal spending data confirmed US consumers haven’t put away their wallets this year. We think a re-

bound in Q2 consumption, as households start to spend more of their tax refunds, will push GDP growth back

above a 3% pace.

INFLATION A FACTOR IN BOND MARKET MOVES

Perhaps the bigger takeaway from March’s consumer spending report was a jump in the PCE deflator, the Fed’s

preferred inflation gauge. The increase in year-over-year core inflation from 1.6% to 1.9% was largely due to last

March’s decline in wireless telephone services dropping out of the calculation. But price growth was running at a

2.5% annualized pace in Q1, indicating the recent trend has also picked up somewhat. That rate isn’t enough to

cause panic at the Fed, but it certainly reinforces some committee members’ views that inflation risks are increas-

ingly skewed to the upside.

Markets have taken notice of the recent pickup in price growth. The inflation premium baked into 10-year Treasury

yields has risen by 20 basis points since the start of 2018. Higher oil prices have been a factor in that move. De-

clining inventory levels and heightened geopolitical risks have pushed WTI oil prices up to nearly $70 per barrel for

the first time since late-2014. The increase in breakeven inflation accounts for about 1/3 of the 10-year yield’s

march to 3% this year. Inflation has arguably been behind some of the move in real yields as well. Growing confi-

dence that the Fed’s 2% target will be met (or even surpassed) on a sustained basis has boosted market expecta-

tions for monetary policy tightening. Like the Fed, investors are now roughly split on whether three or four total rate

hikes will be warranted this year.

US ECONOMY SLOWED LESS THAN EXPECTED IN Q1

Josh Nye

▲ US Q1 GDP came in above expectations despite some seasonal

adjustment issues that weighed on growth.

▲ The Fed’s preferred inflation gauge jumped back to around 2%

after a transitory price decline last year fell out of the calculation.

▲ Rising inflation and energy prices have put upward pressure on

market-based inflation, which the Fed is still characterizing as

“low”.

▲ The Fed’s latest policy statement wasn’t as hawkish as some were

looking for though didn’t really dent the odds of a rate hike in June.

HIGHLIGHTS


FED TAKES A PASS IN MAY, CONSISTENT WITH GRADUAL TIGHTENING

In keeping with their guidance that interest rates will increase only gradually, the Fed held monetary policy steady at

the beginning of May following a rate hike at the previous meeting. Most of the changes to the policy statement rep-

resented a mark-to-market of recent data. With the advance Q1 GDP report in hand, the Fed confirmed consumer

spending growth moderated while business investment continued to grow strongly. There was no mention of season-

al distortions being behind the consumer slowdown, but that issue was flagged in the March minutes so we doubt

policymakers are overly concerned. The committee acknowledged inflation has moved close to their 2% objective

but still characterized market-based inflation measures as low. That is somewhat surprising with 10-year breakevens

now close to their longer run median. At the same time, however, they dropped the previous reference to “monitoring

inflation developments closely.” We think that is a nod to increased confidence that their inflation objective will be

met on a sustained basis after spending much of the last few years below 2%. Our forecast continues to assume the

Fed will raise rates in June. They didn’t provide an explicit signal in that direction, but arguably didn’t need to with

markets already almost fully priced for a move at the upcoming meeting.

-6

-4

-2

2

4

6

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Bureau of Economic Analysis, RBC Economics Research

U.S. real GDP Quarter-over-quarter, annualized % change

Forecast

1

2

3

4

5

6

7

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Federal Reserve Board, RBC Economics Research

Forecast

%

U.S. Target Rate


FINANCIAL MARKETS

The rebound in Canadian GDP in Feb-

ruary was even stronger than expected

with a 0.4% increase easily erasing Jan-

uary’s disappointing 0.1% decline. Oil

and gas output rose as temporary shut-

downs eased, though that was offset by

further pullback in the real estate indus-

try. Both moves were largely anticipat-

ed. Outside of volatility in those sectors,

growth was stronger and more broadly-

based in February. As with Canada’s

jobs numbers, these data seem to con-

firm that the economy’s slow start to the

year was only transitory. On balance,

we think the monthly figures are con-

sistent with the economy expanding at a

trend-like 1.8% pace in Q1.

…BUT SPENDING DETAILS

ARE LOOKING A BIT SOFT

While it looks like GDP increased at a trend-like pace in Q1, we think domestic demand made a much smaller con-

tribution to activity early this year. Recall that even with headline growth slowing to 1.6% in the second half of last

year, domestic spending still increased at a 4% rate. We are now seeing some payback from that unsustainable

strength. Revised retail sales data point to consumer spending slowing sharply. At the same time, housing likely

shaved 1/2 percentage point from growth in Q1 after tighter mortgage rules were implemented in January. Busi-

ness investment also lost a bit of steam to start 2018, though some of that reflected M&E purchases having been

pulled forward into late-2017 before a change in emissions regulations took effect.

With the Bank of Canada having raised interest rates three times over the past year, some slowing in consumer

spending and housing was to be expected. But the first quarter’s drop-off in those sectors looks overstated. Rising

debt service costs will certainly take a bite out of households’ disposable income but that shouldn’t be enough to

slam the brakes on spending. Given solid fundamentals of low unemployment, steady job gains and rising wages,

we are confident that consumption growth will rebound from Q1’s forecasted 1/2% pace. That said, we aren’t likely

to see anything close the average gains of more than 3% seen last year. Meanwhile, the sharp pullback in Q1

home sales won’t be repeated going forward as most local markets appear to be adjusting to higher qualifying

rates. Homebuilding activity has also held up fairly well in the face of softer resales, helping to offset some of the

decline in real estate activity.

BANK OF CANADA NOT IN A RUSH TO RAISE RATES

The Bank of Canada left the overnight rate unchanged at 1.25% for a second consecutive meeting in April. Despite

the steady decision being almost universally expected, the Canadian dollar still sold off thanks to Governor Poloz’s

cautious tone. While maintaining a tightening bias, he seemed to put additional emphasis on a number of head-

CANADA’S ECONOMY REBOUNDED IN FEBRUARY…

Josh Nye

▲ Canadian GDP rebounded 0.4% in February after a 0.1% decline

in the prior month.

▲ We think Q1 GDP growth was close to trend, but with less support

from domestic spending than in H2/17.

▲ While higher interest rates will continue to weigh on household

finances, consumer spending is expected to bounce back a bit in

Q2.

▲ The Bank of Canada is in no rush to act on their tightening bias.

HIGHLIGHTS


winds including competitiveness challenges, concerns about trade policy, and high household debt. An upward revi-

sion to the economy’s potential growth rate, which means more room to expand without generating inflationary pres-

sure, was also seen as a dovish development—even as growth forecasts were revised higher alongside.

The meeting provided little clarity on when we might expect another rate hike. Governing Council noted increasing

confidence in their tightening bias, but stopped short of signaling a near-term move. That was despite rising inflation

and wage growth, and a fairly positive Business Outlook Survey—the latter flagged by Deputy Governor Lane as an

“important indicator” ahead of April’s decision. We said last month that we still liked the odds of a rate hike before mid-

year, but their recent tone doesn’t seem to point to a move at May’s meeting. Our forecast now assumes just two more

rate hikes over the second half of this year, and another two in 2019 (still 100 basis points of cumulative tightening). A

continuation of recent inflation trends and a pickup in domestic spending in Q2, particularly in business investment,

would boost our confidence that the next rate increase will come in July. Along with the change in our BoC call, we

have revised our forecast for the Canadian dollar. We now see it ending the year at 78 US cents (close to current lev-

els) rather than the modest rally we expected previously.

-10

-8

-6

-4

-2

0

2

4

6

8

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Statistics Canada, RBC Economics Research Forecasts

Canada's real GDP Quarter-over-quarter % change, annualized rate

Forecast

0

1

2

3

4

5

6

7

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Bank of Canada, RBC Economics Research Forecasts

%

Bank of Canada Overnight RateForecast


FINANCIAL MARKETS

The Bank of England held their policy

rate steady in May in a 7-2 split as only

the MPC’s most hawkish members vot-

ing for a hike. The decision was largely

expected, with odds of a rate increase

falling significantly in the lead-up to the

meeting. Some of that reflected a more

dovish tone from Governor Carney.

Ahead of the meeting, he threw cold

water on expectations for a near-term

move by noting that May isn’t the BoE’s

only opportunity to raise rates. Softer

economic data also stayed the BoE’s

hand. While survey indicators were

pointing to a slow start to the year for

the UK economy, Q1’s 0.1% GDP gain

still represented a sizeable shortfall rel-

ative to expectations. Adding to the dis-

appointment, the Office for National

Statistics downplayed the impact of bad

weather, noting the effect was small and narrowly-based. The construction sector provided much of the drag on

growth—with some of that decline coming before the worst weather hit—and fully offset a gain in the much larger ser-

vices sector. Industrial production actually got some help from wintry conditions as energy production rose. Other data

have been more balanced if not slightly underwhelming, The unemployment rate declined further in February and is

now back below the BoE’s longer-run estimate. But wage growth and inflation were slightly lower than expected. We

now expect the BoE will raise rates in August, though that will be contingent on the economy rebounding in Q2. April’s

PMI data weren’t definitive on that score, so upcoming data releases will take on greater-than-usual significance for

near-term monetary policy.

EURO AREA Q1 SLOWDOWN LOOKS TEMPORARY

The euro area economy was also impacted by colder-than-usual temperatures early this year. Q1 GDP growth slowed

to 0.4% from the 0.7% pace seen through much of last year. That moderation was concentrated in Northern Europe

where the weather effect was most acute, with labour disruption in France also weighing on activity. This slowdown

won’t have come as a surprise to the European Central Bank—it was flagged by survey indicators toward the end of

the quarter, and President Draghi noted transitory factors were likely to blame. Early PMI data for Q2 are consistent

with growth of 0.6%, supporting the idea that the dip in Q1 growth will be short-lived. Outside of weather disruptions,

the euro area economy continued to improve with the unemployment rate edging lower again in Q1. Inflation remains

low but some very early evidence of stronger wage growth should reinforce the idea that less monetary policy stimu-

lus will be needed over time. The ECB’s latest meeting didn’t result in any changes in policy or forward guidance. In-

stead, it looks like they’ll start laying out plans for an eventual end to net QE purchases at their next meeting in June,

or perhaps July. We think the change in guidance will reinforce market expectations, and our own, that the ECB isn’t

likely to begin raising interest rates before mid-2019.

BANK OF ENGLAND TAKES A PASS ON MAY RATE HIKE

Josh Nye

▲ UK GDP growth slowed to just 0.1% in Q1, and the statistics agen-

cy downplayed the impact of severe winter weather.

▲ UK survey data point to only a modest rebound in Q2 GDP.

▲ Euro area GDP growth slowed to 0.4% in Q1, with some weather

effects also at play.

▲ Softer employment growth points Australia’s unemployment rate

continuing to trend sideways.

HIGHLIGHTS


OFFSETTING INFLATION AND JOBS DATA KEEP RBA IN NEUTRAL

Australia’s core inflation unexpectedly moved higher in Q1, averaging 2% for the first time since 2015. The report rep-

resented an upside surprise relative to the Reserve Bank of Australia’s previous forecast, but they downplayed the

miss in their policy statement noting recent inflation data were “in line with expectations.” Indeed, while they raised their

forecast for underlying inflation in the near-term, they still see it stuck at the lower end of their 2-3% target band into

2020. And offsetting the upside surprise on inflation, labour market data has softened in recent months. Trend employ-

ment growth has slowed significantly this year, keeping the unemployment rate steady at 5-1/2%. Having previously

looked for a further decline in the jobless rate, the RBA’s updated forecast now shows the current level of labour mar-

ket slack persisting throughout 2018. That reinforces the central bank’s expectation that wage growth will remain low

“for a while yet.” On balance, we think the RBA’s revised forecasts are consistent with the central bank remaining on

hold into 2019. If anything their tightening cycle could be delayed relative to what our current forecast suggests.

-3

-2

-1

0

1

2

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Eurostat, RBC Economics Research

% change, quarter-over-quarter

Eurozone real GDP growth

Forecast

-1

0

1

2

3

4

5

6

7

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: ECB, RBC Economics Research

Forecast%

ECB refi rate


HOME RESALES STABILIZE IN CENTRAL CANADA IN MARCH; NATIONAL PRICES

STILL EASING

Existing home sales eked out their first monthly increase in three months across Canada in March, rising

1.3% from February. This came on the heels of a significant drop of more than 19% in the previous two

months.

The March increase may be an early sign that the initial effect of the new stress test is beginning to fade

though not everywhere in Canada at this stage.

Gains in Manitoba, Ontario and Quebec were mainly behind the increase at the national level. Activity de-

clined further in almost all other provincial markets.

The national benchmark price decelerated to its slowest annual pace (4.6%) in more than four years primari-

ly reflecting an ongoing price correction in the Toronto area where the annual change is negative for the first

time since 2009.

More sellers put their properties up for sale in Canada in March, which is keeping demand and supply in bal-

ance in most markets across the country.

The uptick in national resales in March is consistent with our view that Canada’s housing market is now be-

ginning to move past the payback period for activity pulled forward ahead of the new stress test on January

1, 2018. The way forward is likely to be uneven though. New market-cooling measures announced in the BC

budget are poised to lengthen the adjustment process in that province.

First signs of spring in March

Canada’s housing market isn’t becoming unhinged. Statistics released by the Canadian Real Estate Association

showed that after sliding by more than 19% in January and February, home resales eked out a small monthly

gain of 1.3% in March. This may be early evidence that the initial effect of the new stress test that came into ef-

fect on January 1, 2018, is beginning to fade. It’s been our view since OSFI announced more stringent qualifying

requirements for uninsured mortgages that the initial impact would be to pull sales forward ahead of the new

rules taking effect on January 1. The small sales increase in March may well be a sign that payback for earlier

widespread strength has largely run of its course.

CURRENT ANALYSIS ROBERT HOGUE


FORECAST DETAIL - CANADARBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS

= Forecast

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018 2019

Household consumption 3.5 4.6 3.7 2.1 0.5 2.0 1.9 1.9 1.7 1.7 1.6 1.7 2.4 3.5 2.0 1.8

Durables 10.9 7.6 1.1 1.6 -0.5 1.9 1.7 1.7 1.6 1.6 1.5 1.5 4.5 6.4 1.4 1.6

Semi-Durables 1.4 7.3 3.2 1.2 -1.3 1.9 1.9 1.9 1.8 1.6 1.8 1.8 2.2 3.4 1.4 1.8

Non-durables 1.7 6.1 0.6 1.8 -1.3 1.9 1.7 1.9 1.8 1.7 1.7 1.8 1.7 2.6 1.1 1.7

Services 2.8 3.0 5.7 2.5 1.7 2.1 2.0 2.0 1.8 1.8 1.7 1.8 2.2 3.2 2.5 1.8

Government expenditures 3.9 1.4 3.6 2.8 2.5 2.5 2.5 2.5 2.0 2.0 2.0 2.0 2.2 2.2 2.6 2.2

Residential investment 9.4 -2.9 -0.2 13.4 -6.3 -2.7 -4.8 -3.7 -2.1 -0.5 0.3 1.2 3.3 3.1 -0.8 -2.0

Business investment 12.1 9.5 5.4 8.2 0.9 2.8 2.3 2.1 2.0 2.0 2.0 2.0 -9.4 2.6 3.9 2.1

Non-residential structures 2.0 10.8 7.2 5.4 2.8 2.8 2.5 2.2 2.0 2.0 2.0 2.0 -11.5 0.3 4.2 2.1

Machinery & equipment 29.3 7.7 2.8 12.6 -2.0 2.8 2.0 2.0 2.0 2.0 2.0 2.0 -6.0 6.0 3.5 2.0

Final domestic demand 4.5 3.6 3.9 3.9 0.6 1.9 1.6 1.7 1.6 1.6 1.7 1.8 1.1 3.0 2.2 1.6

Exports 2.7 6.3 -10.4 3.0 -0.5 6.5 5.2 2.5 3.3 1.7 1.8 2.0 1.0 1.0 1.4 3.0

Imports 13.9 6.2 0.3 6.3 2.3 2.5 1.5 2.0 2.5 1.0 1.7 2.1 -1.0 3.6 2.9 1.9

Inventories (change in $b) 10.2 14.0 16.9 13.8 23.8 20.3 17.5 17.5 17.5 16.6 16.6 16.6 1.0 13.7 19.8 16.8

Real gross domestic product 4.0 4.4 1.5 1.7 1.8 2.4 2.1 1.8 1.8 1.7 1.7 1.7 1.4 3.0 2.1 1.8

OTHER INDICATORS YEAR-OVER-YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED

Business and labour

Productivity 2.2 2.5 1.1 1.0 0.3 0.6 1.4 1.5 1.3 1.2 1.0 1.0 0.6 1.7 0.9 1.1

Pre-tax corporate profits 26.0 35.5 14.2 8.9 2.6 5.9 7.2 4.6 3.6 2.8 2.1 0.9 -1.9 20.2 5.0 2.4

Unemployment rate (%)* 6.6 6.5 6.2 6.0 5.8 5.9 5.9 5.9 5.9 5.9 5.9 5.9 7.0 6.3 5.9 5.9

Inflation

Headline CPI 1.9 1.3 1.4 1.8 2.1 2.6 2.8 2.5 2.2 2.1 2.0 2.1 1.4 1.6 2.5 2.1

Core CPI 2.0 1.4 1.4 1.6 1.8 2.1 2.2 2.4 2.3 2.3 2.2 2.2 1.9 1.6 2.1 2.2

External trade

Current account balance ($b) -54.6 -61.3 -74.4 -65.4 -64.0 -56.3 -49.9 -49.5 -48.6 -46.8 -46.3 -46.2 -65.4 -63.9 -54.9 -47.0

% of GDP -2.6 -2.9 -3.5 -3.0 -2.9 -2.5 -2.2 -2.2 -2.1 -2.0 -2.0 -2.0 -3.2 -3.0 -2.4 -2.1

Housing starts (000s)* 222 207 223 229 224 204 200 193 191 191 189 189 198 220 205 190

Motor vehicle sales (mill., saar)* 2.08 2.10 2.08 2.04 2.10 2.00 1.98 1.97 1.94 1.93 1.92 1.92 1.72 2.08 2.01 1.93

INTEREST AND EXCHANGE RATES %, END OF PERIOD

Overnight 0.50 0.50 1.00 1.00 1.25 1.25 1.50 1.75 2.00 2.25 2.25 2.25 0.50 1.00 1.75 2.25

Three-month 0.52 0.71 1.00 1.06 1.10 1.20 1.45 1.65 1.90 2.15 2.15 2.15 0.46 1.06 1.65 2.15

Two-year 0.75 1.10 1.52 1.69 1.78 1.95 2.15 2.30 2.50 2.50 2.40 2.30 0.75 1.69 2.30 2.30

Five-year 1.12 1.40 1.75 1.87 1.97 2.15 2.35 2.55 2.75 2.80 2.75 2.65 1.12 1.87 2.55 2.65

10-year 1.62 1.76 2.10 2.04 2.09 2.35 2.55 2.75 2.90 3.00 3.00 2.90 1.71 2.04 2.75 2.90

30-year 2.30 2.14 2.47 2.27 2.23 2.50 2.75 2.90 3.05 3.15 3.15 3.10 2.31 2.27 2.90 3.10

Canadian dollar 1.33 1.30 1.25 1.26 1.29 1.30 1.28 1.28 1.26 1.26 1.27 1.28 1.34 1.26 1.28 1.28

*Quarterly averages, level

Source: Bank of Canada, Statistics Canada, RBC Economics Research forecasts

GROWTH IN THE ECONOMY PERIOD-OVER-PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED

Annual2017 2018 2019


FORECAST DETAIL - UNITED STATESRBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS

= Forecast

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018 2019

GROWTH IN THE ECONOMY PERIOD-OVER-PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED

Consumer spending 1.9 3.3 2.2 4.0 1.1 3.1 3.2 2.7 1.7 2.3 2.3 1.8 2.7 2.8 2.7 2.4

Durables -0.1 7.6 8.6 13.7 -3.3 6.6 4.5 2.8 2.2 2.3 2.2 1.6 5.5 6.7 5.1 2.8

Non-durables 1.1 4.2 2.3 4.8 0.1 3.1 4.5 3.5 1.9 2.5 2.4 1.8 2.8 2.4 2.8 2.8

Services 2.5 2.3 1.1 2.3 2.1 2.6 2.6 2.5 1.6 2.3 2.3 1.8 2.3 2.2 2.2 2.2

Government spending -0.6 -0.2 0.7 3.0 1.2 0.6 2.4 2.7 2.4 2.4 2.4 2.4 0.8 0.1 1.5 2.3

Residential investment 11.1 -7.3 -4.7 12.8 0.1 3.7 3.8 3.4 1.8 0.9 1.9 1.2 5.5 1.8 2.6 2.3

Business investment 7.1 6.7 4.7 6.8 6.1 5.5 6.5 5.7 2.8 2.8 2.6 2.6 -0.6 4.7 6.0 3.9

Non-residential structures 14.8 7.0 -7.0 6.3 12.3 4.0 6.5 5.2 4.0 4.0 2.0 2.0 -4.1 5.6 5.6 4.1

Non-residential equipment 4.4 8.8 10.8 11.5 4.7 6.3 7.2 6.5 3.5 3.5 0.7 0.1 -3.4 4.8 7.7 4.1

Intellectual property 5.8 3.7 5.2 0.9 3.6 5.3 5.2 5.0 4.8 3.6 2.6 2.6 6.3 3.9 3.9 4.3

Final domestic demand 2.4 2.7 1.9 4.5 1.6 3.0 3.5 3.1 2.1 2.5 2.2 1.8 2.1 2.5 2.9 2.6

Exports 7.3 3.5 2.1 7.0 4.8 5.5 3.2 3.2 3.0 2.8 2.8 2.8 -0.3 3.4 4.6 3.1

Imports 4.3 1.5 -0.7 14.1 2.6 3.1 7.4 6.0 5.4 3.0 2.8 3.2 1.3 4.0 5.1 4.7

Inventories (change in $b) 1.2 5.5 38.5 15.6 33.1 26.0 25.0 29.0 33.0 33.0 33.0 38.0 33.4 15.2 28.3 34.3

Real gross domestic product 1.2 3.1 3.2 2.9 2.3 3.1 2.8 2.8 1.8 2.4 2.2 1.8 1.5 2.3 2.8 2.4

OTHER INDICATORS YEAR-OVER-YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED

Business and labour

Productivity 1.1 1.4 1.5 0.9 1.4 1.4 0.9 1.4 1.3 1.2 1.2 1.0 0.1 1.2 1.3 1.2

Pre-tax corporate profits 3.3 6.4 5.4 2.7 5.8 6.3 2.5 3.3 2.6 2.1 2.3 2.1 -2.1 4.4 4.4 2.3

Unemployment rate (%)* 4.7 4.3 4.3 4.1 4.1 3.9 3.9 3.8 3.8 3.7 3.7 3.7 4.9 4.4 3.9 3.7

Inflation

Headline CPI 2.5 1.9 2.0 2.1 2.2 2.7 2.6 2.1 1.8 1.9 2.0 2.2 1.3 2.1 2.4 2.0

Core CPI 2.2 1.8 1.7 1.8 1.9 2.3 2.3 2.3 2.0 2.1 2.2 2.2 2.2 1.8 2.2 2.1

External trade

Current account balance ($b) -451 -495 -406 -513 -524 -518 -553 -577 -598 -603 -607 -614 -452 -466 -543 -605

% of GDP -2.4 -2.6 -2.1 -2.6 -2.6 -2.6 -2.7 -2.8 -2.9 -2.9 -2.8 -2.9 -2.4 -2.4 -2.7 -2.9

Housing starts (000s)* 1238 1167 1172 1256 1318 1285 1300 1315 1315 1315 1325 1325 1177 1208 1304 1320

Motor vehicle sales (millions, saar)* 17.1 16.8 17.1 17.7 17.1 17.3 17.3 17.3 17.3 17.3 17.4 17.4 17.5 17.1 17.3 17.4

INTEREST RATES %, END OF PERIOD

Fed funds 1.00 1.25 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 3.25 3.50 0.75 1.50 2.50 3.50

Three-month 0.76 1.03 1.06 1.39 1.73 1.90 2.15 2.35 2.65 2.90 3.15 3.35 0.51 1.39 2.35 3.35

Two-year 1.27 1.38 1.47 1.89 2.27 2.50 2.65 2.80 3.00 3.25 3.40 3.55 1.20 1.89 2.80 3.55

Five-year 1.93 1.89 1.92 2.20 2.56 2.80 2.95 3.10 3.25 3.45 3.55 3.65 1.93 2.20 3.10 3.65

10-year 2.40 2.31 2.33 2.40 2.74 3.00 3.15 3.30 3.45 3.60 3.70 3.75 2.45 2.40 3.30 3.75

30-year 3.02 2.84 2.86 2.74 2.97 3.35 3.50 3.60 3.70 3.75 3.80 3.85 3.06 2.74 3.60 3.85

Yield curve (10s-2s) 113 93 86 51 47 50 50 50 45 35 30 20 125 51 50 20

*Quarterly averages, level

Source: Bank of Canada, Statistics Canada, RBC Economics Research forecasts December 2016

Annual2017 2018 2019


CANADA - US COMPARISONS CURRENT ECONOMIC INDICATORS

FROM

PRECEDING

MONTH

FROM

YEAR AGO

YEAR-TO-

DATE

LATEST

MONTH

FROM

PRECEDING

MONTH

FROM

YEAR AGO

YEAR-TO-

DATE

LATEST

MONTH

Industrial production* 1.4 4.5 1.5 Feb. 0.6 4.4 -0.2 Mar.

Manufacturing inventory -

shipments ratio (level) 1.4 1.4 1.4 Feb. 1.4 1.4 1.4 Mar.

New orders in manufacturing 5.0 8.1 0.9 Feb. 1.6 8.1 -0.6 Mar.

Business loans - Banks 1.5 8.1 6.9 Mar. 0.8 2.6 6.8 Mar.

Index of stock prices** 1.6 0.1 1.7 Apr. -1.8 12.5 9.3 Apr.

Retail sales 0.4 3.5 5.0 Feb. 0.6 4.5 3.2 Mar.

Auto sales -2.2 2.3 3.3 Feb. -3.4 -16.6 -8.1 Apr.

Total consumer credit*** 0.2 5.2 4.0 Mar. 0.3 5.0 5.1 Mar.

Housing starts -4.9 0.4 5.7 Apr. 1.9 10.9 6.0 Mar.

Employment 0.0 1.5 1.2 Apr. 0.0 1.3 1.6 Apr.

Consumer price index 0.3 2.3 1.5 Mar. 0.2 2.4 1.37 Apr.

Producer price index**** 0.8 2.3 0.9 Mar. -0.1 2.3 0.1 Apr.

Policy rate 1.3 0.5 - Apr. 1.6 0.9 - Apr.

90-day commercial paper rates 1.7 0.8 - Apr. 2.0 0.9 - Apr.

Government bonds -

(10 years) 2.3 1.6 - Apr. 2.9 2.3 - Apr.

Seasonally adjusted % changes unless otherw ise indicated. Interest rates are levels.

*The U.S. series is an index.

**Canada = S&P/TSX; United States = S&P 500

***Excludes credit unions and caisses populaires

****Canada's producer price index is not seasonally adjusted

Business

Households

Prices

Interest rates

CANADA US

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