Canadian economic outlook sound

While the Canadian economy remains “fundamentally sound” entering into 2006, Swiss Re Economic Research’s “Canadian Economic Outlook” reports somewhat mixed results as November’s strength moderated and December revealed job losses and a decline in the trade surplus.
According to Swiss Re’s report, the BoC is likely to raise its target rate to 4% by year-end, however the economy is expected to continue to post around 3% real growth.
Additionally, real GDP saw an increase of 0.2% in October, after moving sideways in September. Almost 75% of this gain came from manufacturing output, which Swiss Re says improved 1%, on strong demand from the US.
Utility output suffered due to warm weather, and services output suffered due to a teacher’s strike, according to the Company’s most recent report.

Employment
Labor market conditions remain favorable despite the 2,100 job losses in December, which Swiss Re reports were mostly part-time jobs. Full time positions, the Company continues, exhibit a better gauge of underlying strength as they increased by 36,000.
The rate of unemployment, according to the report crept up to 6.5% from November’s record low. Manufacturing appears to be the weakest job creating sector.

Retail Economy
Swiss Re reports a robust growth of 0.6% m-o-m for October retail sales, which is largely a result of strong auto sales. Ex-auto, retail sales fell 0.3% although Swiss Re says this decline can be attributed to the effect of easing gas prices rather than declining volumes.
Swiss Re claims that retail sales volume actually increased 1.4% in October, which indicates the strongest gain in nearly a year.
December auto sales were up 2.9% y-o-y to 117,800 units, which the report indicates has brought the year’s total to 1.58 million units, 3.2% higher than 2004.

Housing
A strong, but moderate note was noticed for housing as it rolled to an end in 2005.
December starts were up 1.2% over the prior month to 227,700 annualized units, but Swiss Re says that overall the year saw a modest decline from 2004’s record.
The gradual softening of the housing market is likely to continue as the BoC continues to raise rates, according to the report.

Trade
Canada’s trade surplus slipped to $6.9 billion in November, which Swiss Re says is a decrease from October’s $7.6 billion results.
Nominal exports fell 2% to $39.7 billion, which the report indicates is the first decline in nine months, as the price of natural gas softened. Imports however, remained stable having only declined a nominal 0.1% to $32.8 billion from October’s record.

Consumer Price Index
The report indicates that the CPI fell 0.2% m-o-m in November, as energy prices eased. While core inflation excluding the eight most volatile components of the CPI increased 0.4% m-o-m.
Compared to year ago, Swiss Re says the CPI is higher by 2%, and the core by 1.6% in line with ER&C forecasts.
The year-end 2006 BoC target rate forecast is 4.0%, the 5-year bond yield 4.7% and the 10-year bond yield 5.0%, according to the report.
The Canadian dollar, Swiss Re says, is likely to weaken marginally this year, with the Canadian and US dollar exchange rate forecast to be 0.83 by year-end.