Canada Stumbles Out Of The Gate In 2016

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A pair of disappointments came in housing starts and in the Q4 Business Outlook Survey this week, revealing some flaws in the recovery of a fragile Canadian economy.

This erosion in residential investment, business investment and hiring intentions is concerning, since it would contradict the Bank of Canada’s (BoC) expectations for resilience within housing and non-energy business.

The BoC expects housing growth to be stable over 2016, and business fixed investment to only be a slight drag over the balance of the year. We think that the BoC will cuts rates in the first half of this year, especially if the housing and non-energy business space continues to disappoint.

Housing Starts – Soft December housing starts capped off what was a very strong year for Canadian housing. Starts fell to an annualized level of 173k in December, down 39.1k (-18.4%) from November.

The housing upswing was certainly one of the few positive themes of last year as the country navigates a challenging term of trade shock. Nonetheless, this was the largest month on month fall in construction in 3 years, led by disappointments in Ontario and in the oil-linked prairie cities of Calgary and Edmonton. Starts were geographically broad-based, falling in 7 of the 10 provinces.

The 3-month moving average of housing starts appears to show a peak in the trend this past autumn. If this trend continues, it will contradict the BoC’s prediction of stable residential investment in 2016.

The Bank of Canada’s Q4 Business Outlook Survey – The results of the survey added to today’s woes, revealing an erosion in business sentiment.

Investment and hiring intentions dropped to their lowest levels since 2009, indicating that the commodity shock may be spreading beyond the resource sector. These weak intentions were concentrated in domestically oriented firms and those tied to the resource sector. One bright spot in the report was that on the whole, non-commodity exporters plan to increase their investment on the back of the weak CAD. We believe non-energy exports are going to be an important indicator. The BoC may be able to tolerate slowing housing investment, but a deterioration in non-energy exports as well could have a major negative impact on  their economy.

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