May 22, 2012

June 16, 2011

Canada’s GDP growth in first quarter 2011 outperformed U.S.

Alex Carrick

Chief Economist, CanaData

The annual rate of Canada’s real gross domestic product growth, increased to + 3.9% in the quarter ending March 31, 2011, up from +3.1% in the prior three months, according to Statistics Canada.

This was the fourth period in a row in which the rate of real output growth (i.e., adjusted for inflation) has moved higher. The increase in GDP at an annualized rate was +2.5% in Q3 10 and +2.3% in Q2 10.

Since the recession in Canada, which occurred from the final quarter of 2008 through the mid-point of 2009, the fastest quarterly rates of growth were recorded in Q4 09 (+5.0%) and Q1 10 (+5.6%).

While Canada’s recession may have been short, there was a moment when it was quite brutal.

First-quarter 2009 GDP change was -7.9%, a much sharper rate of decline than at any time during either of the recessions in the early 1980s and early 1990s. However, those two recessions lasted longer, for six and four quarters respectively.

The most recent pattern of GDP growth in Canada diverged from what happened in the United States. South of the border, the U.S. Bureau of Economic Analysis reported the rate of advance in the overall economy slowed to +1.8% in the first quarter from +3.1% in the previous three months.

There was a surprise contained in the numbers. It wasn’t consumer spending that helped the Canadian economy out relative to the U.S. In fact, the opposite occurred. Real consumer spending in the U.S. in Q1 10 grew much faster than in Canada, where it hardly increased at all (+0.2%).

One area where Canada made up ground, however, was in residential investment. Canada’s quarter-to-quarter change in housing expenditures was +9.4% in the latest period. The U.S. registered another decline, -3.3% annualized.

Residential investment in the U.S. has been negative in 18 of the last 21 quarters, sometimes by as much as -30.0% or more (e.g., Q1 09). During the same period, Canada recorded 11 declines, with the sharpest being -23.4% in Q4 08.

In both countries, goods imports grew faster than goods exports in the latest period. In Canada, the numbers were +8.2% annualized for exports and +10.8% for imports. The comparable figures south of the border were +13.2% and +17.4%.

It’s not unusual for the U.S. to be taking in more products from outside its borders than it is sending abroad. But for Canada, long-term GDP strength has depended on exceptional export sales, particularly to the U.S.

At this time, the continuing underperformance of the U.S. economy, leading to a moderation in the value of the greenback, has resulted in a rapid pick-up in U.S. exports. In the meantime, Canadian producers have been struggling with a currency, the loonie, that has been much higher-valued than historically. This leads into a consideration of another GDP line item.

Canada did draw strength in the latest quarter from an accumulation of inventories. But if consumers are pulling back and external demand (from the U.S.) remains slow to materialize, this is an area of the economy that may be subject to adjustment in the quarters ahead.

From an industrial standpoint, Statistics Canada says manufacturing as well as oil and gas extraction were the biggest contributors to growth in the latest quarter. Corporate profits were ahead 5.1% quarter to quarter. Profits are an income measure, so they are reported in current dollars. On a year-over-year basis, Canadian corporate profits were +13.4% before taxes.

With continuing questions about the buoyancy of demand from a less-than-stellar U.S. economy, housing starts that were brought forward into the early part of this year to avoid new mortgage approval rules and reductions in government spending both on stimulus projects and as part of belt-tightening measures, Canada’s +3.9% growth rate in the first quarter is likely to be followed by some trending down into the +2.0% to +2.5% range in the remaining quarters of 2011.

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

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