Canadian GDP Weaker Than Forecast

November 30, 2010

Real GDP expanded 1.0% at an annualized rate last quarter.  In the Bank of Canada’s Monetary Policy Report published last month, officials had projected growth of 1.6%.  Growth in Canada was less than half as fast as the 2.3% pace in the second quarter and less than a fifth as strong as the 5.2% annualized pace between 3Q09 and 1Q10.  U.S. growth had traced a similar pattern, decelerating from a pace of 4.3% in the two quarters to 1Q10 to 1.7% in the second quarter of this year but then accelerating to 2.5% in the third quarter.

The main difference between Canada and the United States last quarter lay in the magnitude of drag from net foreign demand.  Net exports subtracted 3.45 percentage points of GDP growth in Canada, twice as much as the 1.75 percentage point negative contribution to U.S. growth in the same quarter.  In Canada exports sank 5.0% at an annualized rate, while imports advanced 6.4%.  For six consecutive years from 1.5696 per USD in 2002 to 1.0667 in 2008, the Canadian dollar had appreciated in year-average terms against its U.S. counterpart.  After retreating 6.5% to 1.1407 in 2009, the loonie has averaged 1.0322 so far in 2010, a gain of 10.5%.  And at 1.0322, this year’s mean value is 52% stronger than what such was in 2002.

The negative impact of net exports on growth is corroborated in a rising nominal current account deficit.  From 2.3% of GDP in the first quarter of 2010, the external shortfall widened to 3.2% in 2Q10 (when the U.S. ran a deficit equal to 3.4% of GDP) and 4.3% of GDP last quarter.  The deterioration of the current account has had limited effect on the Canadian dollar because of relentlessly heavy net capital inflows.  Foreign purchases of Canadian securities net of Canadian purchases of foreign securities averaged CAD 7.688 billion per month last quarter, slightly less than the pace of CAD 8.785 billion per month during the first half of this year.

Real final domestic demand in Canada advanced at a brisk 3.8% annualized rate, with gains of 19.6% in non-residential investment and 3.5% in personal consumption.  However, residential investment fell by 5.3%, and inventory building only enhanced growth by 0.6 percentage points.  In only one month of the quarter, August, did real GDP increase.  Industrial production fell 0.9% in September, led by a 2.0% drop in mining and oil extraction.  Compared to a year earlier, GDP growth of 3.4% in 3Q was identical to the advance in 2Q10 and similar to September’s increase of 3.5% and to U.S. on-year growth last quarter of 3.2%

Canada’s GDP price deflator was 2.8% higher last quarter than in the third quarter of 2009.  Its year-on-year advance had been 3.3% in the first half of 2010.  Canadian consumer prices unexpectedly jumped 0.7% in October, lifting the 12-month rate of increase to 2.4% from 1.9% in September.  Core CPI remained below the 2% target but close to such at 1.8%.  Producer prices and raw material prices respectively rose between October 2009 and October 2010 by 2.3% and 5.0%.

The Bank of Canada announced consecutive 25-basis point rate increases on June 1, July 20 and September 8th but refrained from a fourth such move at its last meeting on October 19 when a weaker U.S. outlook, slower growth in emerging market economies, and prospects for softer consumption and residential housing in Canada were cited.  Officials in October acknowledged that monetary policy settings such as the 1.0% overnight money target leave considerable stimulus in place.  Meanwhile, worries about a U.S. double-dip recession have lessened considerably.  Today’s weaker-than-assumed GDP figures do not rule out a fourth rate increase before long especially given the resilience of final domestic demand in Canada.

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



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