Per Statistics Canada reports, the Canadian economy grew at a 1.3% annualized pace in the January-March 2018 period. The region’s GDP growth fell shy of economists’ expectations of 1.8% growth.
Plant shutdowns in the auto sector and disruptions to pipeline operations in the energy sector, temporarily restrained the goods sector output and exports played the spoil sport for the first quarter.
A sluggish housing market, subdued consumer spending and the imposition of steel and aluminum tariffs by the U.S. have put the Canadian economy in a weak spot. Therefore, staying away from stocks from this region would be wise.
GDP Slowdown Continues
Canada’s economy grew by 04% in January and February each, and by 0.3% in March. A contraction in January and a subdued pace of growth in the following two months led to 1.3% aggregate growth in the first quarter.
Contributing to the decline were 1.9% fall in housing investment, slowdown in consumer spending and export volume growth to 0.3% and 0.4%, respectively.
In the third and fourth quarter of 2017, Canada’s GDP grew at 1.5% and 1.7%, respectively. Therefore the most recent read made pointed at the third consecutive quarter’s growth of sub 2%, a subdued performance from 4% average growth in four quarters prior to that.
Housing Under Pressure
Canadian housing markets have been sluggish due to tougher mortgage rules that led to a 1.9% decline in housing investment in the first quarter of 2018. This marked the largest decline in the past nine years.
Housing investment in Canada has hit lows in 2018 due to the new stress test led by a regulatory crackdown and high mortgage rates from an increase in interest rates.
These factors have also led to a decline in the value of resale home. Economists are worried that the lost spark in the housing market may drag down its GDP growth in the coming quarters.
Per Canada Mortgage and Housing Corp., a corporation of Government of Canada, the annual pace of housing starts in April slowed from March.
The seasonally adjusted annual rate of new home construction, which is seen as a measure of the health of the housing market, fell to 214,379 units in April compared with 225,459 in March.
Not-So-Rosy Employment Scenario
The country’s unemployment rate was 5.8% in April 2018, which is the lowest level since 1976. However, per National Bank of Canada, employment creation will not top last year’s blazing pace, but will still support consumption and housing, both of which are nonetheless expected to soften somewhat in 2018 after years of unsustainable debt-fuelled growth.
Trade Tariffs Bother
The biggest concern is the announcement from White House that the earlier tariff exemption provided on steel and aluminum, which expires on Jun 1, will not be renewed. The 25% tariff on steel and 10% on aluminum originally announced on Mar 1 were temporarily exempted till the end of May.
But yesterday, President Trump announced that he will proceed with the tariffs. These duties will hurt jobs and the economy of Canada which is the largest supplier of steel and aluminum to the United States. Canada exports nearly 90% of its steel to the United States — more than any other country, according to the Canadian Steel Producers Association.
This move from the United States will dramatically reduce demand for steel and cause huge job losses.
Moreover, Canada exports to the United States around 84% of 3.2 million tons of aluminum it produces annually. This represents two-third of America’s total aluminum imports, according to the Aluminum Association of Canada.
According to a report by the Washington, D.C.-based Peterson Institute for International Economics (PIIE), Canada’s steel and aluminum industries would lose $3.2 billion annually on account of these tariffs. This would deal the harshest blow to any country and nearly five times as much as US$689 million that China would lose under the tariffs.
Stocks to Stay Away From
Given the overall grim scenario, it would be wise to keep a distance from investing in the stocks from Canada.
Here we mention some Zacks Rank #4 (Sell)-ranked stocks that have also witnessed negative estimate revisions.
Nevsun Resources Ltd. (NSU - Free Report) is a natural resource company engaged in the acquisition, exploration, development and production of mineral properties. You can see the complete list of today’s Zacks #1 Rank stocks here.
The stock has seen the Zacks Consensus Estimate for current-year and 2019 earnings being revised 20% and 30% respectively, downward over the last 60 days.
For 2018 the company is expected to decline at 114.3% compared with the industry’s growth rate of 20.8%.
Alexo Resource Corp. (AXU - Free Report) is a precious metals exploration company with a silver focus and a growing environmental services business.
The Zacks Consensus Estimate for current-year loss has been widened to 8 cents from 6 cents, 30 days ago. Its 2019 earnings estimates have been revised downward by 62% in the last 30 days.
For 2019, the company is expected to decline 225% compared with the industry’s growth rate of 14.8%.
Novagold Resources Inc. (NG - Free Report) is a gold and copper company engaged in the exploration and development of mineral properties in Alaska and Western Canada.
The Zacks Consensus Estimate for current-year loss has been widened to 8 cents from 7 cents, 60 days ago. The same for 2019 has deteriorated to a loss of 6 cents from 5 cents, 60 days ago.
For 2018, the company is expected to decline 33% compared with the industry’s growth rate of 11.2%.
Gastar Exploration Ltd. is an exploration and production company focusing on developing primarily natural gas.
The Zacks Consensus Estimate for current-year loss has been widened to 20 cents from 16 cents, 30 days ago. The same for 2019 has deteriorated to a loss of 19 cents from 15 cents, 30 days ago.
For 2018, the company is expected to grow 5.26% compared with the industry’s growth rate of 13.8%.
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