If Canada's latest economic indicators leave you with only a murky sense of the state of the economy, it's because the winter's messy oil spill is still clouding the waters.
Statistics Canada reported Friday that the year-over-year inflation rate for May was 0.9 per cent, up a hair from April's 0.8 per cent but still a pretty depressed number – indeed, below the bottom of the Bank of Canada's 1-to-3-per-cent target band that serves as its key guide for setting interest rates. On the other hand, the core inflation rate – which excludes gasoline as well as seven other highly volatile components of the consumer price index – was at 2.2 per cent, down only slightly from April's 2.3 per cent, and has now been above the central bank's 2-per-cent sweet spot for 10 straight months.
Meanwhile, the country's retail sales for April dipped 0.1 per cent from March, and were up a tepid 1.7 per cent year over year. The small setback followed two months of strong gains, in which retail sales had gained 2.4 per cent.
Key economic indicators such as these are under considerable scrutiny, as observers try to gauge how well Canada is rebounding from the oil price shock that hammered its economy in the first quarter. Recently, Bank of Canada Governor Stephen Poloz cautioned that the negatives that resulted in a 0.6-per-cent annualized contraction in gross domestic product in the first three months of the year – the worst quarter since the Great Recession – wouldn't have suddenly ended just because the calendar rolled over, even if he still believes they have begun to dissipate.
And while a harsh winter was a factor in the first-quarter weakness, the overriding concern was oil, which has wide-ranging effects on the country's resource-heavy exports, its inflows of income, and employment and investment in key regions. And not least on the list is the effect on the country's consumers. Oil's footprints are all over Friday's two consumer-related economic reports – something we're going have to get used to for a while yet.
It's plain that inflation's year-to-year underperformance is all about oil. Despite price gains in recent months, gasoline in May was still down 17 per cent from a year earlier. The energy sector overall was down 12 per cent. If you exclude energy's fall from the equation, the rest of the index was up 1.8 per cent from a year earlier – not far at all from the Bank of Canada's 2-per-cent target.
Similarly, the retail sales figures remain coloured by the effect of gasoline prices. Gas station sales slipped 0.5 per cent in April; from a year earlier, they were down a massive 17.5 per cent. Excluding them, year-over-year sales were up a brisk 4.6 per cent.
But consumer energy prices are bouncing back fast, now that crude oil has stabilized around $60 (U.S.) a barrel, up nearly $20 from its winter lows. The latest weekly tracking of pump prices across the country, from petroleum analysis firm MJ Ervin & Associates, indicates that average gasoline prices are up 9 per cent in the past month alone, and up 35 per cent from their early-January lows.
It's noteworthy that pump prices peaked at about this time a year ago; they worked their way lower throughout the summer, before sinking dramatically through the fall. Assuming prices hold close to current levels, gasoline will remain a drag on both 12-month inflation and retail sales numbers for a few more months yet – but a shrinking one. By October, the year-to-year comparisons would cross over, and gasoline would be a positive contributor again.
Still, the effect of an oil recovery won't be one-sided. In the retail numbers, for instance, higher prices will help gas stations, but declining oil savings will constrain consumers' wallets for other purchases. In inflation, rebounding oil prices will lift the bar, but the rise in the Canadian dollar that will go along with an oil recovery will temper prices for imported goods.
Perhaps the bigger question is what sort of Canadian economy is emerging from the oil shock, and how much of that emergence will be seen in the current quarter, which ends in a couple of weeks. The growth pace is what, ultimately, will determine where inflation is going over the rest of the year.
And so far, we haven't seen much to suggest that this has been the big-rebound quarter that many observers had hoped. April's manufacturing sales and exports were disappointments, failing to deliver any of the hoped-for bounce-back from the sluggish winter. But this week's wholesale trade report showed a sharp 1.9-per-cent gain in April from March, and Statscan's May Labour Force Survey suggested solid job gains so far this quarter.
Over all, it looks like the second quarter will be better than the first, but not by much. Private-sector forecasters are leaning toward still-weak 1-per-cent annualized growth for the quarter, perhaps a bit less given the sluggish start from retail – well below the 1.8 per cent that the Bank of Canada forecast in its quarterly outlook in mid-April.
Evidence is building that, oil asterisks or not, we won't have a great deal of economic momentum heading into the second half of the year. In that light, the central bank's quite bullish expectations for the second half – it has forecast growth at 2.8 per cent annualized in the third quarter and 2.5 per cent in the fourth quarter – are starting to look increasingly rose-coloured.