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Good news on Canada?

Over the past few days there has been a large amount of Canadian economic news:

(a)                Retails sales fell more than anticipated
(b)               Inflation was lower than anticipated (1.7%)
(c)                Q2 GDP growth is down (2.5%)
(d)               Wholesale trade was down, and inventories are rising

The data is a mix of good and bad news; the Canadian economy is clearly slowing, the Baltic Dry Index, which has dropped dramatically over the past month is an illustration of the change in trade of heavy things – for which Canada specializes.  Housing market seems to have reached an inflexion point, in all but two markets the losses of the 2007-08 housing slowdown have been fully made up (Calgary is still off by 10%). 

One key issue for Canada is inflation.  It would appear that deflation is not a problem in Canada, inflation appears to be well within the 1% to 3% range that the Bank of Canada favors at around 1.7% (once you strip out energy and food),  slightly down from the 1.8% level, and below the consensus forecast of 1.9%.

Worrying is the fall in wholesale trade and the commensurate rise in inventories, and the unknown as to capacity utilization.  Statistics Canada doesn’t provide a breakdown of the merchandise trade, so it is difficult to determine what percentage of imports are machinery – a reaction to the increase in the Canadian dollar that will force manufacturing firms to increase automation and reduce labor costs (via an increase in productivity).

The BoC has revised its growth forecast downward, and has also revised its estimate for the level of excess capacity available in the Canadian economy.  According to the Bank of Canada, 2010 GDP growth will be around 3.5% for the year, and full capacity utilization will not occur until the end of 2011.

Canada’s economist is dependent on exports; oil prices are hovering around $75 bbl and have for nearly a month.  Exchange rate between the CAD and USD is around 1.02 or 0.98 (depending on the scale used). 

Little economic news is expected this week, aside from the National Bank Terranet House price Index on Thursday, which everyone is anticipating to be flat.

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