Bank of Canada on the Canadian Economy

Bank of Canada on the Canadian Economy

While reading the Monetary Policy Report for January 2016 by the Bank of Canada, I figured that there was definitely some information on the pages which could help the average retail investor and better position them for decision making going into 2016. This is part 2 of this mini-series; this part focuses specifically on the Canadian Economy.

Part 1 of the Monetary Policy Report excerpts were focused on the Global Economy.

After my highlighted excerpts,  I will add my own little take on some of the information and briefly mention which stocks are of interest concerning the information consumed.

The following are excerpts taken directly from the Monetary Policy Report for January 2016 by the Bank of Canada.

All credit for every following excerpt goes to the Governing Council of the Bank of Canada: Stephen S. Poloz, Carolyn Wilkins, Timothy Lane, Agathe Cote, Lawrence Schembri and Lynn Patterson.

Canadian Economy Excerpts from the Bank of Canada

Activity in the non-resource sector has been relatively solid and is expected to be the main source of growth going forward. A reorientation of the Canadian economy toward the non-resource sector is being facilitated by the ongoing U.S. recovery, the lower Canadian dollar, and the accommodative monetary and financial conditions. (11)

The Canadian Economy Continues to Undergo a Complex and Lengthy Adjustment to the Decline in Canada’s Terms of Trade

The structural nature of the adjustment has implications for the long-run production capacity of both the resource and non-resource sectors and will involve a long-term reduction in the resource share of the economy and a compensating increase in the non-resource share. (12)

The commodity-producing sector has shrunk rapidly, significantly reducing investment and employment, and the effects of this process on the level of GDP are expected to peak roughly in mid-2016.(12)

The timing of the reallocation to the non-resource sector is also more uncertain than that associated with the resource sector. in particular, this adjustment process is expected to be protracted, extending well beyond the projection horizon. (12)

The ratio of unemployment to job vacancies has risen sharply in the energy-producing provinces

On the labour side, net interprovincial migration to Alberta in the third quarter of 2015 was at its lowest since 2010. […] At the same time, Ontario registered the largest inflow of interprovincial migrants since 2002. (12)

Inflation has been below 2 per cent, as expected

The effects of exchange rate pass-through are particularly pronounced in the prices of fruits and vegetables, as well as in those of core goods such as appliances, clothing, reading material and some other food products. (15)

Given the persistence slack in the economy, measures of core inflation would be lower without the impact of the exchange rate pass-through. Pass-through is estimated to have boosted CPIX inflation by about 0.5 to 0.7 percentage points in the fourth quarter of 2015. (15)

Inflation was higher than anticipated during 2015

Gasoline prices remain high relative to oil prices

After rebounding in the third quarter, real GDP growth likely stalled in the fourth quarter…

Output across sectors is progressing along different tracks

…and the degree of slack in the economy has been increasing

Total employment growth was solid during 2015, with gains outside the resource sector more than offsetting losses in the resource sector; the incidence of involuntary part-time work declined noticeably; and the duration of periods of unemployment has also fallen. (18)

Net job gains over the past year were concentrated in full-time positions, many of these were in the category of self-empowerment, which is historically associated with weak economic activity. (18)

The adverse impact of the decline in oil prices has gradually spread outside Western Canada into all regions and sectors

Accomodative financial conditions are supporting ongoing adjustments

Issuers of corporate debt in the energy and resource sectors are facing higher borrowing costs and tighter credit conditions (20)

Borrowing rates remain very low, although they have risen in recent months

Lower commodity prices are depressing activity in the resource sector

Weaker profitability and sharply lower capital expenditures in the oil and gas sector will further reduce production and exports of energy over the medium term. (20)

Currently assumed prices for oil are approaching break-even prices on a cash flow (i.e., average variable cost) basis for many producers. As a result, there are greater downside than upside risks to production and investment stemming from oil price movements. (21)

The Oil and Gas Sector: Industry Perspectives

Medium-term price expectations remain positive, largely because of the view that deep cuts in capital expenditure globally are setting the stage for tighter supply in the future and therefore an eventual recovery in prices. (21)

Further cost reductions are becoming more difficult to achieve, however. Many firms indicate that neither they nor their suppliers are able to generate additional substantial cost savings or productivity increases in the short-term. (21)

Capital budget guidance for 2016 shows that further cuts to spending are likely to be significant

Unlike conventional oil producers, oil sands producers find it difficult and expensive to scale back production, causing some to operate temporarily at a loss. With low oil prices persisting, firms anticipate more painful wage and staff cuts ahead. (21)

Struggling companies that are unable to remain competitive will restructure or exit the industry, while healthier companies will look for opportunities to purchase distressed assets and improve scale efficiencies. (21)

Non-commodity exports sensitive to the exchange rate are expected to outperform…

Non-commodity exports will also be supported by continued growth in foreign demand. (22)

Growth in non-commodity goods exports has been led by components that are sensitive to movements in the Canadian dollar, roughly two-thirds of which are showing positive momentum and are outperforming those that are less exchange rate sensitive. […] Many subcategories of non-energy-commodity and non-commodity goods exports – such as potash, seafood products, and ships, locomotives and rapid transit equipment – showed sizable gains during 2015 (Chart 18 and 19).

In the services sector, travel services have benefited from the lower Canadian dollar and the resulting change in travel patterns. The number of international visitors to Canada has picked up, while the number of Canadians going abroad has declined (Chart 20). (22)

A number of subcategories of non-energy-commodity goods exports showed sizable gains in 2015

Similarly, several subcategories of non-commodity goods exports performed well

Currency movements are affecting foreign travel

Firms engaged in non-commodity exports are more optimistic about growth in their sales prospects over the coming year than firms that are more oriented towards domestic sales. (23)

…which should support a pickup in business investment outside the resource sector

Business investment is expected to expand starting in the second half of this year as the drag from reductions in spending in the oil and gas sector dissipates. (24)

As domestic production becomes more competitive, a few firms reported plans to move production back to Canada. (24)

Tourism-related activity has increased and further gains are expected. (24)

Household expenditures are expected to expand moderately

The overall ratio of debt to disposable income will likely edge higher in the near term. (25)

Quick Thoughts From The Dividend Beginner

On Potash Stocks

One interesting thing I note here is seeing “Chart 18: A number of subcategories of non-energy-commodity goods exports showed sizable gains in 2015”, where, much to my surprise it shows that Potash prices have increased roughly 20% from January – November 2015 as opposed to January – November 2014, when, in fact, Potash prices have been falling and is the reason that Potash Corp. has been having so much trouble and recently had to cut their dividend. The thing about this is that potash prices have been increased in Canadian dollar terms, but falling in U.S. dollar terms. While this makes sense, it took me a moment to register as I saw the chart and believed it made no sense. You can see the Potash price chart in US dollars vs the Potash price chart in CAD dollars for yourself. The falling price of potash is one of the few reasons why I have not invested in Agrium (AGU). I find this a safer alternative to Potash Corp. of Saskatchewan (POT), however POT should be in better shape than before after the dividend cut. Regardless, I don’t like companies which ever cut their dividends. I also like AGU’s diversity in their income streams. As I have the desire to hold less and less commodity-influenced stocks, it may be a while before I invest in potash.


On Transport Stocks

From “Chart 19: Similarly, several subcategories of non-commodity goods exports performed well”, the stocks that come to mind immediately as I see the top two largest gains in order are: Canadian National Railway (CNR) and Magna International (MG). I’ve gone over my thoughts for Magna International in my first look at the Bank of Canada’s Monetary Policy Report, while MG isn’t really a transport stock I included it here due to it’s appearance in Chart 19. Canadian National Railway has now showed up in my two monthly Stock Watch Lists twice in a row, for January and February 2016 – proving that it’s a high-quality asset at a decent price. Unfortunately the yield is very low compared to other options for February, but the dividend growth on CNR is very high and is a great reason for the stock price to increase over time. In fact, CNR recently increased their dividend 20%. These are both high-quality assets.


On Travel Stocks

With the Canadian dollar battered down so low, there has been a surge in tourism in Canada. From Chart 20, since the beginning of 2015 we can deduce that non-resident travelers to Canada has been increasing steadily, while Canadians traveling abroad has been shot down big-time. The only stock which comes to mind for this situation and which follows the DGI methodology is WestJet Airlines (WJA). However, according to their most recent results released, their Western Canada exposure has caused a large drop in their earnings. Considering I’ve looked extremely little into travel stocks, I am not in a position to write much about this sector as I have yet to find a compelling reason to invest in it. So, I will leave you with this information concerning WJA for futher learning. WJA also has a decent 3%+ dividend yield and a PE below 6. It’s something to look into further, which was the point of this post!


That’s a wrap guys! I really hope this overview helped, even just a bit. Reading through these excerpts opened up my eyes a bit and got me looking in a couple new directions, which is exciting. I didn’t go in depth on any specific stock but brought up a couple, so check them out if you have an interest. Be sure to perform your own due dilligence!

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