The big Canadian banks weigh in on today’s GDP release

BMO: November GDP came in at a solid +0.4%, matching the consensus call and the best reading since May. Growth was broad-based with 17 of 20 sectors seeing gains in the month. Goods sectors led the way higher, with manufacturing activity surging 1.8% as autos rebounded following production shutdowns that weighed on the prior two months. A chemical plant restarting after a few months of maintenance also contributed to the strength in manufacturing. Other sectors seeing good gains include utilities (+0.7%) amid more normal weather, retail (+0.6%), wholesale (+0.5%), and real estate (+0.4%) as home sales picked up ahead of the mortgage rule changes. Mining, oil & gas also rose 0.5%, as oil sands activity picked up after a maintenance shutdown hit October, though softness in mining and support services provided some negative offset. The firm headline print is a welcome bounce back from October’s flat reading, but will make it tough to hit the Bank of Canada’s forecast for 2.5% GDP growth for all of Q4. Even so, GDP is still up a very solid 3.5% y/y, with every sector except agriculture and management above year-ago levels. After a sluggish start to Q4, the Canadian economy rebounded in November as some one-time factors reversed. While hitting the BoC’s Q4 GDP forecast is going to be challenging, this report won’t change much from a policy perspective for the Bank, which remains in cautious tightening mode

CIBC: This winter started with some warmer-than-usual temperatures, and Canadian output in November had some heat in it as well. The 0.4% gain was the strongest reading on monthly GDP in six months, and catches up to more or less where we thought we would be, before a string of recent disappointments on growth indicators. Still, today’s results only keep us in the 2% or so range for Q4, slightly under the BoC’s recently released, and unchanged, 2.5% forecast. That suggests a pause through the winter and spring is still the most likely outcome for rates. The star of the show in today’s release was the factory sector, which contributed roughly half of the economy’s overall increase. A strong month was signalled early on, with the trade report highlighting a pop in two-way trade. Most of the strength in manufacturing was tied to autos, which after four straight months of declines totalling over 20%, closed most of the gap by expanding at a 14.3% clip. Still the rest of manufacturing grew by just over 1%, and ex-transportation factory production is tracking a 5% annual pace. Oil & gas was also on the positive side of the ledger (+1.6%), with stronger output reported in non-conventional production as facilities return to more normal production after maintenance turnarounds which started in the fall. We’re looking for more growth in the sector in the year ahead, as firmer pricing for light crude incentivizes conventional production, while a major oil sands facility gears up for what is likely to be 200k bbl/day of output sometime in 2018. Retail/wholesale trade saw modest increases as we had expected, with the continued rotation toward an earlier shopping season and the release of a popular new phone helping to lift core consumer spending. The monthly track to consumption isn’t going to fall off a cliff, but we don’t think that the 5% pace in real retailing, or the 10% growth in wholesale volumes, is going to hold up in the year ahead. Eventually interest hikes will start biting, and as we near full employment, the pace to job gains should slow. November was as good as we thought it would be, but it’s not enough to change our outlook for 2% growth in Q4, or what we think will be a wait-and-see approach from the Bank of Canada through the spring. Today’s report showed a bounce back in manufacturing but to sustain further meaningful growth, we’re going to need to see investment in export capacity— something we’re not convinced is coming in the near-term given the increased attractiveness of the US in light of recent tax cuts, and serious concerns on the trade front regarding NAFTA.

RBC: GDP rose 0.4% in November after a surprisingly weak flat reading in October. Nonconventional oil extraction bounced back 3.7% to reverse a 3.4% decline in October that was reportedly the result of transitory maintenance shutdowns. A 1.8% surge in manufacturing output also reflected a retracement of earlier weakness as shutdowns of some motor vehicle and chemical production in earlier months ended. Increases outside of those two components were generally more modest but widespread. Statistics Canada noted 17 of 20 industries posted increases in November. Yes, uncertainties remain about the outcome of NAFTA renegotiations and that could have significant implications in particular for the manufacturing sector that accounted for a big chunk of November’s GDP growth. Looking through monthly volatility, though, the GDP numbers add to the evidence that the Canadian economy as a whole continues to grow at an ‘above-potential’ pace even as it increasingly looks to be operating at or beyond its long-run capacity. With inflation still remaining well-behaved, the Bank of Canada can continue be cautious about raising interest rates, particularly in light of elevated household debt levels. Absent a downside surprise on near-term growth or an unexpectedly ’bad’ outcome from NAFTA negotiations, though, we expect the central bank will continue to ease off on the accelerator in terms of monetary policy and look for gradual interest rate hikes to continue this year.

Scotiabank: Strong growth in November combined with last week’s further increase in core CPI (here) present evidence to somewhat hawkishly inform the BoC’s data dependent posture in support of our forecast for another rate hike by Spring. The economy grew at its strongest monthly pace since May and this materially raised tracking of Q4 growth. Manufacturing played a major role in driving growth (see weighted contributions below). Indeed this is a global phenomenon backed by rising trend readings across purchasing managers indices drawn from the manufacturing sectors of numerous countries and regions. Canada is no exception to this which emphasizes how zero-sum trade policies have no role to play in today’s global economy. Integrated global manufacturing operations of multinationals can indeed be a case of how a rising tide lifts all boats. The data did not add to pre-release momentum in CAD or the 2 year GoC yield but on net it reinforced a stronger currency and mild cheapening at the front end of the rates curve this morning. 17 of 20 sectors advanced and the broad details are at least as good as the headline. The sector details slightly improved the dispersion of growth readings but not by much because the weighted contributions were skewed. In weighted contribution terms, the goods sector accounted for about 58% of GDP growth in November and services accounted for the remainder. Within goods, manufacturing accounted for the lion’s share and represented 45% of overall GDP growth during the month. Within manufacturing, durable goods were up 2.5% m/m and led by autos as we saw in the manufacturing report for the month, while nondurables advanced by 1.1%. Manufacturing GDP has been trending higher since late 2016 and so some of the strength in November is transitory following prior shutdowns in the auto sector while some of it fits a trend. Across other goods sectors, the mining/quarrying and oil/gas extraction sector accounted for 9% of GDP growth. Utilities accounted for 4% of GDP growth, construction accounted for less than 1% of GDP growth and agriculture/forestry/fishing was a mild net drag on GDP growth. Within services, the biggest contributor to weighted GDP growth was real estate and rental/leasing that explained 13% of GDP growth during the month. Retail trade (about 8% of GDP growth), wholesale trade (about 7%), finance/insurance/real estate (about 5%) and the professionals category (4%) were the next biggest contributors to GDP growth. Growth tracking incorporating back months is now 1.7% q/q SAAR. That’s up about a full percentage point compared to prior to the November figures. This is progress toward the BoC’s 2 ½% Q4 GDP growth forecast in the January MPR but we’ll still need a rather strong December reading or difference in GDP tracking sources to get there. How strong? About 0.6% m/m, or tied with last May. I think that’s unlikely, not least of which because the autos contribution is unlikely to repeat in December in my opinion since it largely reflected a transitory gain following prior shutdowns that were somewhat seasonally unusual. That doesn’t mean the BoC’s growth forecast is impossible to achieve but the risk is clearly skewed lower. Monthly GDP incomeside figures often don’t track expenditure-based GDP figures very well and differences of +/- ½% between the two are not uncommon and are sometimes bigger. Major reasons for this include the fact that the income side of the GDP accounts doesn’t consider why production changed or how, like inventory investment changes or swings in import content.

(BMO/CIBC/RBC/Scotiabank)