No Immunity For Canada

October 31, 2008

Canada does many things right. The government budget has been in surplus for 11 straight years. Core inflation is below but close to 2.0%. The current account  surplus equaled  0.9% of GDP last year and 1.7% of GDP in the spring quarter of this year. But being so entwined with the U.S. economy in its financial and trade ties and being a commodity-intensive economy at a time of sharply falling commodity prices, Canada is very exposed to global economic weakness and financial market turbulence. Canada’s own currency soared 79% from $1.6194 per USD in January 2002 to $0.9061 last November, then plunged 30% to a low of $1.3017 this past week.

Canadian GDP fell 0.3% in August on declines of 3.1% in wholesale turnover, 1.1% in factory output, and 0.3% in construction as well as no change in retail activity. To be sure, GDP had risen 0.7% in July, but the see-saw pattern throughout 2008 leaves GDP with a 12-month increase of only 0.6%. That gain is merely a fourth as much as recorded in the previous year to August 2007. The table below compares 12-month changes in GDP and some of its key industrial components in the successive years to August 2007 and August 2008. The slowdown has been broadly based. Bank of Canada officials recently downgraded projected real GDP growth to 0.6% from 1.0% in 2008 and to 0.6% from 2.3% in 2009. Contributions toward this year’s 0.6% growth rate are +3.0 percentage points (ppts) from real final domestic sales, mitigated by drags of 1.9 ppts from net exports and 0.5 ppts from a rundown of inventories. In 2009, officials assume a halving of the growth in real final domestic sales so that such enhances GDP growth by just 1.4 ppts, and that positive contribution will be offset by a continuing negative effect from net foreign demand amounting to -0.8 ppts. Residential construction, non-residential business investment, and exports are all forecast to decline in 2009.

  12 months to 8/08 12 months to 8/07
GDP 0.6% 2.4%
Industrial Output -3.3% 0.2%
Manufacturing -4.0% 0.2%
Construction 1.2% 4.2%
Energy 1.9% 3.2%
Wholesale Sales 0.1% 3.1%
Retail Turnover 2.8% 5.9%



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