September 15, 2010
Economy at a Glance
Canada’s second quarter GDP growth lower than expected
Canada’s gross domestic product (GDP) growth in 2010’s second quarter was only +2.0% annualized, according to Statistics Canada. This was at the low end of the range (+2.0% to +3.0%) expected by most economists.
First-quarter growth was almost three times as fast, at +5.8%, although that figure was revised down from an originally reported +6.1%. Canada is still outperforming the U.S. where Q1 growth was +3.7% and Q2 was +1.6%.
Foreign trade took a big chunk out of Canada’s second-quarter growth rate. Goods imports (+18.4%) pulled away from goods exports (+6.2%) on a quarter-to-quarter annualized basis.
Final domestic demand, which omits trade, increased at a +3.5% pace. Just the same, there were signs of weakness at home. Consumer spending eased back to +2.6% in Q2 from +4.3% in Q1. Durable and semi-durable goods purchases declined, while spending on services forged ahead.
The contribution of the residential sector was greatly diminished in Q2. First, renovation activity was down as a natural consequence of Ottawa’s tax incentive progam ending in February.
Second, the earnings of real estate agents and brokers have fallen with the break in the resale housing market. Also, new home starts have tailed off slightly, with further declines to come.
Auto sales in Canada have not been showing the kinds of gains south of the border. U.S. sales fell further in the recession. On the plus side, stronger U.S. demand has helped Canadian exports.
Investment in machinery and equipment (+29.7% annualized) was a particular bright spot in Canada’s Q2 economy. Over the longer term, this will help raise Canadian productivity.
The high-valued Canadian dollar has been a factor. A good deal of machinery and equipment is imported. This has also accounted for some of the greater expansion of imports versus exports.
Second-quarter business investment in non-residential structures was flat (+1.0%). However, government gross fixed capital formation (+4.2%) continued to make a significant contribution.
Further with respect to trade, the Canadian dollar near par with the greenback has encouraged more Canadian travel abroad. The spending in such circumstances is considered to be an import.
Corporate profits before taxes in Q2 were -1.0%, the first decline dating back to Q2 2009.
The prospect is for a further slowing in growth in the third and fourth quarters of this year. Residential markets have lost some of their fizz. Export sales to a still slumbering U.S. economy will be in more jeopardy.
Consumer spending will be affected by lower confidence as a result of greater uncertainty about job prospects. Plus there are higher taxes to contend with (i.e., the HST introductions in Ontario and B.C., although “transition” cheques are being written by Ontario’s government.)
In the meantime, private construction investment remains restrained. Efforts to beat the March 31, 2011 deadline for project funding by Ottawa will see some jobsite building activity heat up.
Bank of Canada Governor Mark Carney has said any further increase in interest rates will depend on how the world economic recovery is unfolding. So far Canada has been the only G-7 nation to move its key policy-setting interest rate higher since the flare-up of the credit crunch.
Based on Canada’s latest GDP report, there is now less likelihood of further rate increases in the second half of 2010. The U.S. and Japanese economies are struggling. China and India are trying to pull back on too rapid growth. Europe, in a strange twist, is performing better than expected.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His lifestyle blog is at www.alexcarrick.com
Based on quarterly constant (chained 2002) dollars, seasonally adjusted at an annual rate (SAAR figures).
Data source: Statistics Canada | Chart: Reed Construction Data - CanaData.
Based on quarterly constant dollars, seasonally adjusted at an annual rate (SAAR figures).
For the U.S., chained 2005 dollars; for Canada, chained 2002 dollars.
Data sources: Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce and Statistics Canada | Chart: Reed Construction Data - CanaData.
