Canada / Analyst Insights
H1 2019 Canada Macroeconomic Update

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by Mario Ismailanji, Senior Technical Analyst; Rachel Hyland, Senior Industry Analyst; Ryan Roth, Lead Industry Analyst
Sep 09 2019

At the start of 2019, the Canadian economy was weighed down by uncertainty and lingering weakness stemming from interest rate hikes, weak construction investment and geopolitical risks such as Brexit and the trade war between the United States and China. However, economic growth accelerated considerably in Q2 as the housing market improved and net exports supported strong economic growth. GDP increased at seasonally adjusted annualized rates of 0.5% and 3.7% in Q1 and Q2, respectively.

Labouring along

The Canadian economy added a total of 247,500 jobs during the first half of 2019 (H1 2019), including an increase of 106,600 in April alone. While the unemployment rate was 5.6% at the end of 2018, it rose to 5.8% in January 2019 before steadily declining until it reached 5.4% in May 2019. However, as of July, unemployment has risen again to reach 5.7%, primarily due to the labour force expanding after declining significantly in May.

During H1 2019, the Transportation and Warehousing; Business and Other Support Services; and Accommodation and Food Services sectors led the way in terms of job growth, adding 71,000 (+2.7%), 61,000 (+4.1%) and 34,000 (+4.5%) jobs, respectively. Conversely, Educational Services and Other Services (excluding Public Administration) both weighed on job growth, losing 42,200 (-5.2%) and 53,000 (-4.3%) jobs, respectively. The overall number of jobs declined 78,400 in July, a potentially worrying sign for the economy.

While the labour force participation rate remains low compared to historical averages, it has trended up in 2019, remaining above 65.6% for the entirety of H1, which is higher than any month in 2018’s participation rate. In conjunction with unemployment that has remained strikingly low, upward wage pressure has been significant. By the end of Q2 2019, average hourly earnings increased to $27.83, which represents a year-over-year (YoY) increase of nearly 3.8%. Household consumption expenditure in Canada increased at seasonally adjusted annualized rates of 2.9% and 0.5% in Q1 and Q2, respectively. This growth was evenly split between spending on goods and services, which tends to be a good sign, as it indicates consumption diversity in the economy.

Consumption has slowed significantly as the year has progressed, which poses a potential risk for economic growth moving forward since consumer spending accounts for the majority of GDP. However, this risk remains unrealized in 2019; while household consumption expenditure growth was at its lowest rate in several years, GDP grew at its fastest annualized rate since Q2 2017. The primary driver of this GDP surge was robust growth in net exports; exports of goods and services, when adjusted for seasonality, grew an annualized 3.2%, while imports of goods and services declined 1.0%. Such growth is uncharacteristic of the Canadian economy’s recent performance, with net exports growing faster than any quarter dating back to at least the technical recession of 2016. Much of this was driven by the increase in the price of Canadian oil, in addition to high demand for agricultural goods. These favourable trade conditions helped cover up weak consumer spending and overall declines in domestic demand, which, if they continue, would pose potential risks to the economy moving forward.

Construction indicators

Fixed capital investment showed signs of weakness at the start of 2019, with gross fixed capital investment in structures remaining stagnant for much of Q1. Since then, however, residential investment has picked up dramatically, averaging nearly double-digit annualized growth. This aligns with the housing market’s overall recovery, as the market appears to have acclimated somewhat to stringent mortgage regulations and the considerable uncertainty that surrounded late 2018. High consumer confidence, a strong labour market and more dovish monetary policy expectations have been a boost as well, insulating consumers from much of the worry consuming the business world.

This boost is expected to be temporary, however, as fears of a global slowdown have already begun to materialize, most notably in Europe and the United States. While Canada has shown resilience in 2019, global trends will likely weigh on the domestic economy. This is apparent in investment in nonresidential structures, which has grown sluggishly all year and shows no signs of rebounding. Businesses tend to spend more on projects they believe will add value, so a near-stagnation in investment growth is an indicator of pessimistic expectations for the economy in the short-term.

Financial uncertainty

During H1 2019, financial markets enjoyed incredibly strong growth across the board, as Q4 2018 was marked by multiple equity selloffs. A low base enabled year-to-date (YTD) gains to be significant, particularly in Q1, when the S&P/TSX Composite Index grew 12.4%. Interest rates have held steady so far in 2019, and in fact have been leaning dovish. A potential interest rate hike has placed upward pressure on the index, as inflation and unemployment appear to be in control and near the Bank of Canada’s specified targets.

In Q2, growth has been much more subdued, with the Composite growing just 1.7%. Notably, sector growth was quite varied. The worst performer was Health Care, which declined 9.4% in Q2 after growing 49.6% in Q1, while Information Technology outpaced every other sector with 14.8% growth largely due to an extremely strong quarter for Shopify. Despite the overall positive performance of the stock market in 2019, significant uncertainty remains with respect to global slowdown fears and trade tensions between the United States and China, posing a potential risk to the market during the second half of 2019. For instance, equities trended mostly negatively in July when the two-year and 10-year yield curve inverted for the first time since just before the collapse of the financial system a decade ago. The yield curve inversion is significant because it is viewed as a leading indicator of a recession on the horizon, as investors normally require a higher yield for holding bonds for a longer period of time due to the interest rate risk associated with longer periods. Investors viewing the short-term economic outlook with more pessimism and uncertainty than the long-term outlook is a sign of significantly worsening economic conditions.

Subdued IPO and M&A activity

Despite steep declines in Canadian financial markets at the end of 2018, the year posted a respectable finish in the IPO market following a record year in 2017. In 2018, the IPO market reached $2.2 billion in total for the year, boosted by heightened activity in the Mining sector and expanding cannabis companies. 2019 has been characterized by subdued activity, primarily due to uncertainty regarding trade tensions, the pending ratification of the US-Mexico-Canada Agreement (USMCA) and a lack of Canadian-headquartered growth companies attempting to go public. Overall, the first half of 2019 saw only 21 new equity issues on all Canadian exchanges, generating just over $340.0 million. This represents less than a third of the $1.1 billion generated from 20 new equity issues in the first half of 2018. Additionally, activity has slowed as the year has progressed; Q2 2019 saw 13 new equity issues deliver only $13.0 million. Macroeconomic forces have muddied the landscape and made going public an unappealing proposition thus far in 2019. Barring any clear resolutions to the risks currently threatening the global economy, filing to go public will likely remain undesirable for most operators.

Thus far in 2019, merger and acquisition (M&A) activity has declined slightly since the same period in 2018, with notable sector-by-sector differences. For instance, while M&A activity declined across the economy overall, Retail Trade activity rose as buyers acquired distressed or riskier assets. The largest deal of H1 2019 was the acquisition of Goldcorp Inc. by Newmont Mining Corp for $10.0 billion. Overall, a challenging environment and trade concerns loom large for the M&A market in Canada, with the main drivers for M&A strategies being the pursuit of organic growth and operational efficiencies moving forward.




Looking for additional coverage on North American macroeconomic trends? Check out our latest US Q2 2019 Macroeconomic Update on Industry Insider!



Edited by Kieran Newton