Lagging Wholesalers and Inflation Show Weak Canada Recovery

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Falling wholesale sales and slower than expected inflation add to signs that a drop in crude oil prices is damaging Canada’s economic recovery.

Wholesale sales dropped by 0.6 percent in October from the prior month, the fourth straight decline. Economists surveyed by Bloomberg forecast an increase. Statistics Canada also reported Friday from Ottawa that consumer prices in a so-called core basket of goods also had a surprise decline in November from October, the first time in a year it registered a drop.

The reports suggest Bank of Canada Governor Stephen Poloz’s two interest-rate cuts this year may not be enough to kickstart growth. Inflationary pressures are muted even as the Canadian currency slumped Friday to the lowest since 2004 against its U.S. counterpart.

“Canada doesn’t really have an inflation problem, but it seems to have a growth problem, and we’re reminded of that by the disappointing wholesale sales,” said Jimmy Jean, a strategist in the fixed-income group at Desjardins Capital Markets in Montreal. “If growth doesn’t pick up or continues to disappoint, they are still looking like they might react.”

The central bank cut rates in January and July to 0.5 percent, aiming to pull the year-over-year inflation rate back to its 2 percent target. Although total inflation quickened last month to 1.4 percent in November, from 1 percent in October, the core rate unexpectedly slowed to 2 percent as prices for some items including telephone services fell.

Negative Rates

Poloz opened up more room to cut rates with his Dec. 8 speech saying the floor on his policy interest rate was now probably negative 0.5 percent, versus around 0.25 percent during the global financial crisis, Jean said.

Inflation has been below Poloz’s 2 percent target for a year and the recovery from a near recession in the first half is hindered by weak exports and record consumer debt burdens. Further evidence of trouble this week included a 1.1 percent decline in October factory sales, including the lowest petroleum and coal product receipts since the 2009 recession.

In the inflation report, much of the quickening of prices in November came from a more modest decline in gasoline prices than previous reports.

Retail gas prices declined 10.6 percent in November from a year earlier, less than the October rate of 17.1 percent. Food inflation also slowed, to 3.4 percent in November from the October rise of 4.1 percent.

“Inflationary pressures in Canada’s economy remain muted,” Leslie Preston, an economist at Toronto-Dominion Bank, wrote in a research note. Yesterday TD pared its Canada growth forecasts through 2017 and moved back its projected timeframe for a central bank rate increase until the end of that year.

Friday’s inflation figures showed that by some measures prices are falling. On a monthly basis, consumer prices fell 0.1 percent in November. The core rate fell 0.3 percent, the first such decline since December 2014.

Economists surveyed by Bloomberg predicted overall monthly prices would rise 0.1 percent and core prices would be little changed. The survey also forecast total inflation would rise 1.5 percent.

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