Statistics Canada reported today that the nation’s “real” (i.e., inflation adjusted) Gross Domestic Product (GDP) declined at a 3.4% quarter-to-quarter annualized rate in the final three months of 2008. That was the sharpest drop in eighteen years. The following looks at some of the most significant developments for the economy and what to expect in 2009’s coming quarters.

(1) The job-loss effect was just beginning to be felt in the fourth quarter of last year. Employment cuts at that time were restrained and have really only built up momentum in the early part of this year. This will have a much more serious impact on consumer spending and in other areas of the economy as the remainder of this year unfolds.

(2) There will be further deterioration in the residential investment figure, which was -22.1% annualized in the latest data set. The drop in housing starts only just got started in the fourth quarter. The residential sector is very much tied to confidence concerning employment prospects.

(3) Working in the opposite direction, government spending will pick up in the quarters ahead, on account of the stimulus measures contained in the recent federal budget. Most of this additional spending will come in the area of government gross fixed capital formation as opposed to current expenditures on goods and services.

(4) The dramatic currency effect is probably over for a while. The loonie appears to be settling down in a range of 75 to 85 cents U.S. The Canadian dollar is not likely to record a similar drop in value beyond what has already happened. This means that many import prices have already been effectively raised. The currency effect, moving forward, may have more of a beneficial impact through lowering the price of Canadian exports.

(5) Oil prices are not likely to fall any further. This will help to provide a floor value for Canadian exports. In the important energy sector, lower production of oil by Mexico and Venezuela will make the U.S. more dependent on Canada in the future. As for natural gas, the “one-sixth” historical price relationship with oil has been stretched to almost “one-tenth” as new fields in the southeast U.S. and improved technologies (e.g., horizontal drilling) have raised reserves.

CanaData is forecasting real GDP to fall 1.5% in 2009 after a +0.5% change in 2008. In 2010, modest recovery will carry the GDP figure to +2.0% and then improvement will take firmer hold in 2011, at +3.5%.

See also a Market Insights story for more detail (and graphs) on the latest GDP figures for Canada.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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