Weekly Economic Letter

Week in review

Canada – Employment was roughly flat in July according to the Labour Force Survey, disappointing consensus which was expecting a 20K increase. The jobless rate, nonetheless managed to drop one tick to 7% (from 7.1%) thanks to the two-tick decline in the participation rate to 65.9%. Employment gains in the private sector (+26K) and in government (+3K) were exactly offset by decreases in selfemployment (-29K). All in all, paid employment i.e. total employment excluding self-employeds, jumped 29K. The goods sector lost 34K jobs (the fifth decline in a row) as sharp losses in construction more than offset gains in resources and manufacturing. Services sector employment advanced 34K. Full-time employment fell 60K, while part-time employment was up 60K. Still, the LFS says that hours worked grew 0.5%. All told, the July report, while disappointing on the surface, was better in the details. The private sector created jobs, and paid employment recouped most of the prior month’s losses. Given how choppy the series has been this year, it’s best to look at the longer-term trend for a more reliable picture of the Canadian labour market. On a 12-month moving average basis, Canada is creating on average roughly 10K/month, mostly in the private sector, although all on a part-time basis.

The merchandise trade surplus rose to roughly C$1.9 bn in June, the highest since December 2011. The improvement was due to rising nominal exports (+1.1%) and falling nominal imports (-1.8%). The export increase was driven by energy (+2.5%), metals, industrial machinery and consumer goods, which more than offset declines for autos, aircraft equipment, forestry products and electronics. The energy trade surplus rose to an all-time high of C$8.22 bn, while the non-energy trade deficit narrowed to C$6.4 bn, the best since April last year. In real terms, Canada’s exports rose 0.9%, while imports were down 1.1%. For Q2 as a whole, the goods trade surplus was C$2 bn, the largest since 2011Q4. Real exports grew 20% annualized in Q2, the best performance since 2011Q3. In contrast, real imports rose 12.3%, which implies that merchandise trade contributed to GDP in Q2. Investment spending also seems to have contributed to Q2 growth based on healthy imports of machinery and equipment in the quarter. Those results are consistent with an acceleration of Canada’s GDP growth in Q2 after a soft first quarter.

Building permits expanded a consensus-topping 13.5% in dollar terms in June. Consensus was looking for a decrease of 1.9%. The soaring permits were driven by the non residential sector (+32.5% helped by solid gains in industrial permits), complemented by a 0.4% increase in the value of residential permits (+5.5% for singles offsetting a 6% drop for multis). In real terms, residential permits fell 4.6% with a 10.7% drop for multis offsetting a 6.9% increase for singles.

United States – The ISM’s non-manufacturing index rose to 58.7 in July (from 56 in the prior month), the highest since 2005. A reading above 50 implies the services sector is expanding. Buoyed in part by exports, the new orders subindex soared to 64.9, also the highest since 2005. The employment sub-index rose further in expansion territory to a six-month high of 56. The overall ISM, which takes into account both manufacturing and services, rose more than two points to reach 58.3 in July.

The factory report showed a consensus-topping 1.1% increase in orders in June, after a downwardly revised 0.6% decline in the prior month. Transportation orders rose 1.3%, erasing about half of the prior month’s drop. Excluding transportation, new factory orders rose a healthy 1.1%, more than offsetting the small decline in the prior month. Total factory shipments rose 0.5% in June, helped in part by nondurables +0.6%.

The trade deficit narrowed to $41.5bn in June, from a $44.7 bn deficit in the prior month (revised from $44.4 bn deficit). That’s the smallest trade deficit in five months. The improvement in the trade balance was due to a 0.1% increase in exports and a 1.2% drop in imports in nominal terms. In real terms, exports rose 0.3%, while real imports slumped 1.7%. Overall, June’s trade results were better than expected. Note that in its “advance estimate” of Q2 GDP growth (which was reported as 4%), the BEA had assumed exports growing 8.1% annualized and imports growing 13.1% in the quarter. June’s trade report shows that exports actually grew 9.3% and imports rose 11.4% in Q2. In other words, the drag from trade was smaller than assumed by the BEA, implying a likely upgrade to Q2 GDP growth, assuming of course that nothing else changes.

Business non-farm labor productivity rose 2.5% annualized in the second quarter of the year, better than the 1.6% expansion expected by consensus. That came after a downwardly revised Q1 productivity contraction of 4.5% (previously reported as -3.2%). The increase in Q2 productivity was a result of output (+5.2%) growing faster than hours worked (+2.7%). Unit labour costs rose just 0.6% in Q2 after a sharp 11.8% increase in the prior quarter. The increase in productivity is good news in that it provides another element of support to the already strengthening US labour market.

Weekly jobless claims data for the week of August 2nd showed initial claims falling to 289K, from an upwardly revised 303K. The more reliable 4-week moving average fell to a multiyear low of 293.5K. Continuing claims for the prior week fell 24K to 2.518 million.

World – July data showed China’s trade surplus rising to US$47 bn. Exports were up a consensus-topping 14.5% on a year-on-year basis, while imports were 1.9% lower than yearago levels. The Bank of Japan kept monetary policy unchanged at its meeting this week. The BoJ says that inflation expectations are rising and expects the economy to continue on its moderate recovery. It estimates that the year-on-year rate of increase in the consumer price index (all items less fresh food), excluding the direct effects of the consumption tax hike, is around 1.25%. In Germany, factory orders fell 3.2% in June after a 1.6% drop in the prior month. Italy’s real GDP contracted for the second consecutive quarter in Q2. The 0.2% unannualized drop in output was the eleventh decline in the last 12 quarters.

The European Central Bank left the interest rate on the main refinancing operation at 0.15% and the interest rate on the deposit facility at -0.10%. The ECB thought that the policy measures decided earlier have already led to an easing of the monetary policy stance and said that monetary operations to take place over the coming months will add to this accommodation and support bank lending. The ECB remains confident that those measures will contribute to a return of inflation rates to levels closer to 2%. The ECB also kept its forward guidance i.e. “the key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for inflation”. The ECB says that its Governing Council is unanimous in its commitment to using unconventional instruments within its mandate to further address risks of too prolonged a period of low inflation if necessary. The risks surrounding the economic outlook for the euro area remain on the downside.

In the press conference, Mr Draghi said that implementation of the ABS purchase plan depends on action of many actors (e.g. regulators), but reiterated that the ECB is proceeding with its work, e.g. design of the program, regardless of timing of regulatory changes.

To a question about why an annual inflation rate of just 0.4% isn’t enough to prompt ECB action, Mr Draghi said that while inflation is currently low, long term inflation expectations remain firmly anchored. There was a question about deflation concerns in the periphery. Mr Draghi said that this is due to lack of demand and relative price adjustment. He said the ECB doesn’t see self-fulfilling expectations of price declines which would cause deflation to persist over the longer term.

Commenting on the euro’s recent slump, Mr Draghi said that markets now perceive that monetary policy in the eurozone and the US “will diverge for a long period of time”.

Asked about Italy’s return to recession, Mr Draghi pointed to low level of private investment, but was quick to note that this isn’t unique to that country. He says that investment is weak because of expected demand but also due to general uncertainty stemming from the lack of structural reforms. He prescribed “growth-friendly fiscal consolidation”, in the form of lower taxes, lower government current expenditures and, if possible, higher government investment.

With regards to downside risks to the outlook, Mr Draghi said that geopolitical risks are now higher and the Ukraine/Russia crisis will have a bigger impact on the euro area than on the rest of the world. He acknowledged that it was hard to assess the economic impact given the sanctions and countersanctions involving Russia and the eurozone.

Mr Draghi said that the zone’s money and credit dynamics are “less bad” than in the past. He said that bank lending surveys show a pick-up in demand for loans and less tightness on the supply side. He thinks that the TLTRO will happen at the right time, i.e. when there is demand for loans and hence will cause a significant expansion of credit.