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Posted Tuesday February 5, 2019


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GDP

Output declines slightly in November, amid signs the economy is losing momentum

GDP declined by 0.1% month-on-month in November. This was in line with the consensus expectation; GDP growth slowed to 1.7% year-on-year, slowest since January 2017; The details were generally weak, with key cyclical industries losing momentum into year end

Economic output declined by 0.1% month-on-month in November. This was in line with the consensus expectation, but was a bit weaker than our expected flat reading.

In the month, the output of goods producing industries declined by 0.3%, led by manufacturing, construction, and mining and oil and gas extraction. These declines, in the three largest goods producing industries, could not be offset by gains in agriculture or utilities.

Output was unchanged on the services side of the economy.was mixed The declines, which were led by, wholesale trade, retail sales, were largely offset by gains other industries.

From a year ago, the GDP has increased by 1.7%, the slowest pace of growth since January 2017. The decline in GDP growth comes after a period of relative stability, when GDP growth had remained at, or just slightly above, a 2% pace.

Implications

Preliminary data pointed toward weak readings in manufacturing, wholesale trade, and retail sales. However, relative to our expectation, there was more weakness in construction, notably residential. As well, transportation and warehousing, and finance and insurance came in below our expectations. Meanwhile, there were larger than expected gains in administration and waste management, arts and entertainment, and accommodation and food services.

In our view, the sources of weakness in November provide a telling narrative about the health of the economy. Specifically, the sectors where output declined tended to be the largest sectors of the economy, and were generally those that more closely reflect aggregate demand. In particular, there are clear signs that the consumption/housing side of the economy is cooling. We see this in the decline in retail sales, and the drop in residential construction. In fact, residential construction declined for the sixth straight month. We had anticipated a small increase as we had seen some signs that residential construction might have stabilized in November. We do not think that this was merely the result of inclement weather, since utilities output increased only modestly. If weather in the month were severe enough to halt residential construction, we believe that there would have been stronger demand for utilities, notably heat. As a result, we think that the decline in residential construciton reflects underlying weakness in the housing market.

Further, non-energy manufacturing activity has been losing momentum since early 2018, and this trend continued in November. Non-energy manufacturing accounts for 94% of total manufacturing, and is composed of non-energy commodity manufacturing, and non-commodity manufacturing. We would highlight that non-commodity manufacturing, which makes up 55% of manufacturing activity has been essentially flat since May 2018.

Meanwhile, the sectors where output rose tend to be those largely driven by the public sector, and thus are not as closely related to the economic cycle. For example, health care, education, and public administration made some of the largest positive contributions to GDP growth in the month. There was also a positive contribution from real estate; however, this is largely the result of an estimate of the services rendered from the existing housing stock, rather than demand conditions in the housing market.

Overall, today's results suggest to us that the Canadian economy was losing momentum toward yearend, particularly in key cyclical industries.

David Watt, Chief Economist, HSBCCanada











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