Canadian GDP Growth and PPI Inflation Lower Than Expected

November 30, 2009

Canada’s recession ended only barely last quarter, as net exports exerted a 5.3 percentage point (ppt) drag on the annualized growth of GDP.  Growth of 0.4% at a seasonally adjusted annual rate (saar) reflected positive contributions of 1.8 ppts from personal consumption, 1.9 ppts from government spending, 0.5 ppts each from residential investment and all other private investment, and 0.9 ppts from inventories.  Between 2Q and 3Q, government spending jumped 10.6% saar reflecting strong fiscal support.  Exports and imports reverted to positive growth of 15.3% saar and 36.0% saar, while consumption went up 3.1% saar.  Non-residential investment climbed 4.2% saar, about half as fast as the 8.1% increase in residential investment.  GDP had clocked successive annualized contractions of 3.7% saar in 4Q08, 6.2% in 1Q09 and 3.1% in 2Q09, and real GDP showed a 3.2% on-year drop, same as in the year to 2Q09.  Canada had a low savings rate of 4.8% last quarter.  The personal consumption price deflator was 0.1% lower than in 3Q08 after on-year gains of 1.3% in the first quarter and 0.6% in 2Q09.

After dipping 0.1% between June and August, the monthly supply-side calculation of real GDP came to life in September with a 0.4% advance. Industrial production leaped 1.2%, propelled by a 1.8% increase in mining and a 1.1% rise in manufacturing.  All services rose 0.3%, led by a 1.1% increase in retail trade.  Wholesale turnover grew 0.4%.  September GDP was still 3.5% below its year-earlier level.

Producer prices fell 0.3% in October and by 6.3% from a year before, which was even more than the 6.1% decrease in the year to September.  Analysts had expected higher oil prices to result in a rise of overall producer prices.  Whereas a 1.6% in oil and coal products lifted the PPI by 0.2 ppts, the impact of an appreciating Canadian dollar reduced producer prices by 0.7 ppts.

The Bank of Canada is committed to holding the overnight interest rate target at the present low level of 0.25% until the middle of 2010, provided there is no rise in the outlook for inflation.  Today’s released statistics suggest that inflation is more likely to drop below official expectations than to exceed them, possibly postponing the onset of rate raising even longer.  In the October Monetary Policy Report, officials had assumed a third quarter-over-second quarter GDP growth rate of 2.0% saar, five times greater than the actual outcome, and the latest four-quarter contraction of GDP was forecast at 2.8%, 0.4 ppts less than the actual result.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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