Blog

Canada's third-quarter GDP growth turns mildly positive, but the struggle continues

0 1500 Market Intelligence

Alex Carrick

Positions:
Alex Carrick is Chief Economist for CanaData, Reed Construction Data’s Canadian economic forecasting and statistical service.

Economists

It’s no longer life or death, but the Canadian economy continues to struggle. Statistics Canada released September and third quarter real gross domestic product (GDP) results on the last day of November. The month-to-month gain (not annualized) was +0.4%. The quarter-over-quarter gain (annualized) was also +0.4%. The quarter-over-quarter change was the first increase since the third quarter of 2008. It marks the end of the recession after three straight quarterly declines.

It’s no longer life or death, but the Canadian economy continues to struggle. Statistics Canada released September and third quarter real gross domestic product (GDP) results on the last day of November. The month-to-month gain (not annualized) was +0.4%. The quarter-over-quarter gain (annualized) was also +0.4%. The quarter-over-quarter change was the first increase since the third quarter of 2008. It marks the end of the recession after three straight quarterly declines. On a month-to-month basis, the worst for Canada occurred in December 2008 at -0.9%. Also noteworthy is the fact that the second quarter of this year was revised from -3.4% to -3.1%.

The latest GDP figure was a mild disappointment. It suggests that the -2.5% figure previously projected for the year as a whole may be understated. CanaData is expecting growth next year to flip over into positive territory at +2.5%. The economy is operating under extreme fiscal stimulus (a $50 billion deficit) and the loosest monetary policy on record (a 0.25% Bank of Canada target overnight interest rate). These factors will provide better prospects for 2010 than for right now.

Foreign trade acting as a drag

Throughout the recession, the Canadian economy did not reside in the same deep well as the U.S. Therefore, Canadians have been able to maintain imports to a degree that has been a drag on GDP due to lagging exports. Exports are picking up, but they still trail the growth in imports. This cuts into total output. The rise in value of the Canadian dollar versus the greenback has played a role. So has the weakness in the U.S. and world economies. The best news for Canada of late has been the +2.8% GDP growth rate south of the border in the most recent quarter.

The problem on the export side is likely to be exacerbated by developing price bubbles. China’s domestic demand has improved and most estimates of that nation’s growth rate for next year have been raised. Chinese car sales are nearly +50% year to date versus the same period in 2008. But with respect to commodities, China’s demand has been scaled back and world inventories are accumulating even as prices continue to rise. This sets the stage for a serious correction.

Other stress points

There are other continuing stress points for the Canadian economy. The most recent estimate of spending by American travelers in Canada places it at its lowest level in 12 years. Furthermore, economy-wide job cuts are continuing. Rogers has just reduced its executive and management ranks by 900 across the country. Also, Bombardier has cut another 700-plus jobs in Montreal, due to weak demand for its executive jets. The aerospace market will take time to recover, plus new competitors have entered the arena to challenge both Bombardier and Embraer of Brazil.

In world news, the willingness of major banks to lend money for mergers and acquisitions has clearly improved. This is an indication that credit is becoming more readily available. However, the request by Dubai World to delay its debt repayments by six months is a flashback to the financial crises of a year ago. Abu Dhabi, the leader among the seven-nation United Arab Emirates, has said that it will guarantee Dubai’s debt. Still, there has to be some concern that the problems of Dubai World might lead to a ripple effect among outside lenders. In media reports so far, Canadian financial institutions are said to be relatively exposure free.

The wonder is that the city-state of Dubai was able to proceed as far as it did with its grandiose real estate plans. The offshore Palm and World residential developments, featuring man-made islands in the shapes of a palm tree and an atlas when seen from the air, are two projects affected. These typify the excesses that develop when liquidity is too freely available, as it was earlier this decade.

Russia wants the loonie

As a final comment, it is interesting that the government of Russia has recently stated that it will be diversifying its foreign exchange holdings out of the U.S. dollar. This is one more indication that the greenback’s position as the world’s number one reserve currency is in jeopardy. Further weakness in the greenback’s exchange rate will continue long term. The Federal Reserve may be forced to adopt a more hawkish stance with respect to interest rates, once more normal times return. Russia has said that there are several other currencies that it will target as holds instead. The Canadian and Australian dollars have been mentioned specifically.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.

by Alex Carrick

Leave a comment

Or register to be able to comment.