Stronger and Better-Balanced Activity in Canada

February 28, 2011

Canadian real GDP expanded 3.3% at an annualized pace last quarter, accelerating from annualized growth of 2.0% over the previous two quarters.  GDP was 3.2% higher than in the final quarter of 2009 and recorded similar average growth in calendar 2010 of 3.1%. While conceding that the recovery was proceeding somewhat more rapidly than they expected, officials at the Bank of Canada last month projected that GDP would climb just 2.3% in the final 2010 quarter and by 2.4% in 2011.  So this report constitutes a further upside surprise to them.  Monetary policy has been on hold since early September.

A big surprise in today’s report came from net exports. Gross exports of goods and services grew 17.1% annualized, while imports went up only 0.5%, and net exports enhanced GDP growth by 4.5 percentage points.  Much of the foreign demand for Canadian goods was met out of inventories, which augers well for growth in the near future.  Inventories and the statistical discrepancy depressed growth last quarter by 6.0 percentage points (ppts), while consumption, government spending, and non-residential investment made positive contributions of 2.8 ppts, 0.9 ppts, and 1.1 ppts.  The Canadian personal consumption price deflator was 1.3% higher than a year earlier, which is lower than desired.  Officials target the core CPI to be at 2% in the medium term.  Both core CPI and the index that includes all consumer prices are projected to hover in the high 1’s through the first three quarters of next year and not return to 2.0% until 4Q12. 

As the final quarter of 2010 unfolded, GDP growth got progressively livelier, rising 0.3% in October, 0.4% in November and 0.5% in December when industrial production and real wholesale turnover jumped by 1.1% and 1.3%, respectively.

The nominal Canadian current account surplus was also reported today.  The merchandise trade surplus swung from a CAD 6.42 billion deficit in the third quarter to a CAD 0.52 billion surplus, as exports increased 5.8% but imports shrank 1.1%.  Exports and imports were each 10.8% greater than in 4Q09 when the trade surplus equaled CAD 0.43 billion.  The current account deficit narrowed from 4.2% of GDP in 3Q to 2.7% of GDP in 4Q.  The deficit in full-2010 was CAD 50.0 billion or 3.1% of GDP.  Canada had been enjoying current account surpluses before the Great Recession and Canadian dollar appreciation hit the external sector hard.  Prior to 2010, the current account had generated surpluses of 1.0% of GDP in 2007 and 0.4% of GDP in 2008 but a deficit of 2.8% of GDP in 2009.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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