Confidence index down but spending still strong for year, says RBC economist

Bloomberg’s Canadian Confidence Index down markedly over past week, but economy still on track for growth later in the year

Another day, another worrying economic report concerning Canada. Yesterday, the Bloomberg Nanos Canadian Confidence Index reported that the seven days following Brexit experienced the largest one-week decline since July 2015 – down from 59.1 to 57.8. It wasn’t welcome news, especially for an economy still reeling from the Alberta wildfires.

According to RBC economist Josh Nye, however, the data must be taken in context. “Looking at the Bloomberg report, it was a sizeable drop in the past week, but we were coming off year-to-date highs.”

The drop in consumer sentiment was the first significant fall domestically in five months. Nye explains that even in a year where the loonie plunged below 70 cents US, the Fort McMurray disaster dealt another major blow to the energy industry, and then came Brexit and all its associated volatility for the markets – Canada’s economy is still growing, albeit marginally.

“I think it’s important to remember we also saw declines in the confidence measure earlier this year when we had a lot of financial market volatility concerned with slower growth in China,” he says.  “Consumer confidence fell over that period, but when you look at things like auto sales and home sales – both are tracking record levels this year.”

Statistics Canada’s latest report revealed that Canada’s GDP had recovered in April following declines in the previous two months, but the agency stated that events in Alberta meant another drop was likely in May. The economists at RBC concur on this point, but see a greater recovery as the year progresses.

“The Alberta wildfires and the production shutdown meant we cut our Q2 projections,” says Nye. “We expect a rebound in the third quarter when production comes back online. We didn’t change our forecast too much based on Brexit though.”

What is more significant this side of the Atlantic is the upcoming rate decisions by both the Fed and the BoC. This is another area where Nye saw reason to change his position somewhat.

 “We have changed our forecast for the Fed and the Bank of Canada,” he says. “Previously we looked for a Fed rate hike in December, but now it will more likely be next year. Although I don’t think Brexit will have too much of an impact on the US economy, the Fed erred on the side of caution.”

As for the central bank here, Nye sees the BoC’s key rate remaining static. The other main variables concerning Canada’s economic growth will be the price of oil, and its corresponding effect on the loonie. This relationship, Nye posits, should end 2016 on much more stable ground than at the beginning of the year.

“With oil we are looking for the market to move more towards a supply/demand balance later this year,” he says. “I think as oil prices increase you will see a pretty gradual appreciation with the currency. Our forecast currently is 75 cents US at the end of 2016.”

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