Canadian GDP and Producer Prices

May 31, 2010

Canadian real GDP re-intensified at the end of the first quarter, advancing 0.6% on month in March after an increase of 0.2% in February.  That was the fourth time in five months in which GDP grew at least 0.5%.  In the latest month, industrial production, wholesale turnover, and retail sales recorded robust monthly gains of 1.7%, 2.0%, and 1.8%.

On a quarterly national income accounts basis, Canadian real GDP expanded at an annualized 6.1% pace (saar) between 4Q09 and 1Q10 despite a 1.7 percentage point drag from net exportsThis GDP growth rate was twice as fast as U.S. growth last quarter, and it resulted in a swing of on-year growth from minus 1.1% in 4Q09 to plus 2.2% in 1Q10, which was close to U.S. on-year growth of 2.5%.  Personal consumption in Canada advanced 4.4% saar last quarter and accounted for 2.8 percentage points of GDP growth.  Inventories and residential investment were the other major engines of growth in the quarter. Between 1Q09 and 1Q10, the GDP price deflator and personal consumption deflator increased 3.4% and 1.5%.

Canadian producer prices rose 0.3% in April, more than anticipated, and that reduced the 12-month pace of PPI decline to 0.4% from 1.3% in March.  Higher oil prices had a 2.3 percentage point effect on the 12-month rate of PPI inflation, but the strengthening Canadian dollar reduced PPI inflation by 4.6 percentage points.  Raw material prices leaped another 1.7% last month, resulting in a greater 17.3% on-year advance.  Mineral fuel prices were 32.3% higher than in April 2009.

These data seal the strong likelihood that the Bank of Canada will raise its key interest rate to 0.5% from 0.25% tomorrow.  Such will be the first tightening of the cycle.  A bigger 50-basis point move would not be unjustified in my view.  But other central banks have begun tightening with a cautious 25-bp step, and Canadian officials have not signaled that they intend to stand out from the crowd by tightening more aggressively than other central banking authorities.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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