Canada And Global Economy Watch For The Week Ended January 27

Global equity markets posted a positive return over the week ended January 27, with a better-than-expected U.S. gross domestic product (“GDP”) reading easing fears of a deep recession. The S&P/TSX Composite Index advanced, led by the Information Technology sector. In the U.S., the S&P 500 Index finished higher, benefiting from the strong performance of the Consumer Discretionary sector. Oil prices fell, while the price of gold ended largely flat. Yields on 10-year Canadian and U.S. government bonds rose over the week.

BoC signals pause in rate hikes

• At its first rate announcement of 2023, the Bank of Canada (“BoC”) raised its benchmark overnight interest rate by 25 basis points to 4.50%.
• This was the BoC’s eighth consecutive rate increase as it seeks to tame elevated inflationary pressures.
• In its monetary policy report, Canada’s central bank said it expects inflation to remain elevated over the short term but should subside later in the year. Meanwhile, tighter financial conditions are expected to weaken Canada’s economy.
• BoC officials also stated that should the economy progress as expected, they are prepared to leave the bank’s key policy interest rate at its current level.
• This suggested the BoC may pause rate increases as it monitors developments in the Canadian economy.

CFIB’s Business Barometer Index

This is a measure of small business confidence over the next 12 months, rose from 50.9 in December to 51.4 in January. Among the sectors, health (+4.1 points to 60.3) and finance/insurance (+3.4 to 55.4) recorded the largest increases in confidence in the month. Supply chain pressures continued to ease, as 15.3% of firms listed shortage of input products as a factor limiting their ability to grow, down from the 33.5% high reached in April 2022. Similarly, product distribution constraints were mentioned by 16.1% of firms, down from the 28.4% summit attained in early 2022. Consequently, the expected change in average prices over the next year dipped to 3.6%, the lowest level since July 2021. Given the persistently soft confidence over the months ahead, it is not surprising that only 18.1% of firms expected to increase full-time employment in the next 3-4 months, down from 20.2% six months earlier.

U.S. GDP grows more than expected

• According to an advanced estimate, U.S. GDP expanded at an annualized pace of 2.9% in the fourth quarter of 2022, topping expectations of a 2.6% increase.
• This marked the second consecutive quarter of positive economic growth in the U.S., after contracting in the first two quarters.
• Growth was driven by a rise in consumer spending, which offset declines in net trade and residential investment.
• In 2022, the U.S. economy expanded by 2.1%.

U.S. personal spending ticks lower

• Personal spending in the U.S fell by 0.2% in December, matching economists’ expectations.
• This is the second straight decline after spending on gasoline and motor vehicles slipped in December.
• The Personal Consumption Expenditure Price Index (“PCE”), the U.S. Federal Reserve Board’s (“Fed”) preferred inflation gauge, slowed to 5.0% in December, from 5.5% in November.
• December’s lower PCE reading may allow the Fed to slow the pace of rate hikes.

European business activity returns to growth

• A preliminary reading from S&P Global showed that business activity in Europe expanded in January, for the first time since June 2022.
• The growth in business activity was driven by the service sector. In particular, the health care and technology industries posted relative strength in January.
• Overall, the sector benefited from rising employment and only a slight fall in new orders.
• Meanwhile, the manufacturing sector was still contracting, albeit at a slower pace in January over December.
• High inflation and rising interest rates have slowed economic growth in Europe in recent months. This suggests that its economy remains relatively resilient despite expectations of a recession.