Canadian economy not immune to outside forces: report

While geopolitical tensions are grabbing investors’ attention, how is Canada faring domestically?

It’s a bit of a mixed bag, according to Russell Investments Group’s latest quarterly outlook, which noted that while Canada’s economic data has outpaced that of other developed markets, the rosy outlook may not last.

Specifically, Russell’s analysis of Citigroup Inc.’s economic surprise index for Canada showed the country is experiencing some economic slack. The report noted Canada’s economic data was lower on dampened expectations, as well as near historic lows in unemployment. As well, the Bank of Canada noted the domestic output gap, which measures real growth relative to potential growth, turned negative over the past two quarters.

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However, the Bank of Canada is lately standing out from other central banks, maintaining a balanced outlook whereas others are distinctly dovish, added the Russell Investments report. However, this attitude may not carry on for too much longer since Canada’s continued potential for upside is connected to the economic health of its global counterparts, and the U.S. in particular.

The report also noted the outlook isn’t helped by the World Bank’s recent downgrade of global growth and trade for this year, as well as the yield-curve inversion Canada experienced this year, a classic indicator of recession. And as for Canadian currency, oil’s 20 per cent decline from its April highs is putting pressure on the loonie.

Further, the Canadian 10-year treasury yield suffered a massive hit, down from its 2.6 per cent high in October 2018 to 1.5 per cent as of June 10, 2019. Overall, these data points indicate that Canada’s economy isn’t isolated from the movements occurring outside its borders, noted the report.

Looking at Canadian equities, stocks have been restrained as markets eye the ongoing friction between the U.S. and China. The latest earnings revisions for equities have been negative and markets have pulled back from their April highs. Overall, the data led Russel Investments to a neutral rating for Canadian equities, with muted economic growth at less than two per cent likely.

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