This week was dominated by a much-anticipated FOMC meeting that saw policy-makers open the door to rate cuts over the second half of the year. Next week brings some key Canadian data that might determine whether the Bank of Canada follows the Fed in adopting a more dovish stance.
The BoC’s Business Outlook Survey is an important input into BoC decision-making. The latest edition will garner even more attention than usual given a further escalation in global trade tensions since April’s survey. Q1 already saw a sharp deterioration in business sentiment as measured by the BOS indicator, which fell into negative territory for the first time since 2016. A decline in capacity pressures, labour shortages, and inflation indicators contributed to the softening. There was also a modest pullback in investment and hiring intentions, though both remained at respectable levels. Sentiment was more upbeat in services industries, while concerns about slowing US growth and uncertainty over US trade policy worried exporters. Those concerns will only have increased following the latest round of US tariff hikes on Chinese imports and threats of more to come if trade negotiations don’t go well at next week’s G-20 meetings. US tariff threats against Mexico escalated late in the typical survey period, and so were probably not fully captured. The US backed off without implementing those measures, but they count as another reminder that trade tensions can rise and fall with little or no warning. Not all news has been bad for Canada. Steel and aluminum tariffs were finally lifted in May. Labour markets have still been strong and some of the other headwinds highlighted in Q1—uncertainty in the energy sector and weakness in housing—are stabilizing or beginning to ease. But we wouldn’t be surprised to see the overall sentiment indicator remaining negative, and even ticking slightly lower. Investment and hiring intentions (likely to see another small dip) and capacity indicators (perhaps showing a bit more spare capacity) are the ones to watch.
Just ahead of the BOS, April’s GDP report will give insight into whether softer business sentiment is finding its way into activity indicators. March’s GDP figures showed plenty of resilience with nearly every sector growing in the month. April should be a bit more mixed with manufacturing output expected to be flat. That sector will be a focal point in the coming months given a slowdown in industrial production globally (including in the US) that could intensify with recent tariff hikes. Retail sale volumes edged down 0.2% in April though other services industries should pick up some of the slack. On balance we look for GDP to edge up by 0.1% in April, which following March’s more robust gain, should leave Q2 growth tracking a solid 2% annualized rate.
