Reassuring Economic News from Canada

July 11, 2011

After expanding at a 3.5% annualized pace between the third quarter of 2010 and first quarter of 2011, Canadian GDP stagnated in April.  Industrial production that month was also flat, and that was not the full extent of sobering April news released in June.  Merchandise exports fell 1.9%, contributing to a more than twofold rise of the trade deficit to CAD 924 million from CAD 417 million in March and CAD 213 million a year earlier.  Real manufacturing sales fell 1.8%, and nominal manufacturing orders plunged 10.3%.  Wholesale sales slid 0.1%.

Other data have remained upbeat however.  May’s rise in the index of leading economic indicators of 1.0% was the largest since February.  The PMI-IVEY index averaged 61.1 in the second quarter, a solid score especially compared to the reading of 53.7 in 2Q10.  June labor market figures were much better for Canada than the United States.  The 7.4% jobless rate was 1.8 percentage points less than America’s.  Employment was 1.4% higher than in June 2010 and grew at a 2.6% annualized pace during the spring quarter of this year.  Building permits leaped 20.9% in May, and housing starts were 5.8% higher last quarter than in 1Q11.

Today brought two encouraging quarterly surveys from the Bank of Canada.  One canvass of senior loan officers revealed the deepest conviction since at least 1999 that the future direction of change in Canadian lending conditions will be toward greater ease.  The overall index of minus 49.64 was 17.93 points less than in the 1Q11 survey and 24.85 points lower than a year earlier.  The other survey asked corporations about business conditions and prospects, finding considerably more widespread intentions to hire.  Businesses are optimistic about sales especially in the commodity-intensive western provinces, and they plan to invest more aggressively.  The favorable intentions regarding jobs and investment could be seen in most regions and across many industries.

The next Bank of Canada interest rate announcement on July 19, a week from tomorrow, will hold a little more interest than recent ones.  The last tightening was made in September 2010.  Headline inflation of 3.7% was greater than expected.  While energy (16.6%) and food (3.9%) showed strains, core inflation of 1.8% is below the central bank’s 2.0% target, and four out of five respondents in today’s business outlook survey expect CPI inflation to lie between 1% and 3% over the coming year, although an equal percentage anticipate inflation that exceeds 2.0%.  Producer prices tell a similar tale of oil-related elevation.  The overall PPI is 4.5% higher than a year ago, but the index excluding oil products is up just 1.4% on year.  Officials, as always, will have to take into consideration recent developments in the global and  U.S. economies, and both of these have taken a turn for the worse.

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



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