According to Statistics Canada, three factors particularly contributed to the decline (-0.3% quarter to quarter annualized) in Canada’s real (inflation-adjusted) Gross Domestic Product (GDP) in first-quarter 2008: 1) weak motor vehicle production; 2) reduced inventory accumulation versus the final two quarters of 2007; and 3) inclement weather, which had an adverse effect on residential real estate sales and some other business activities.

Auto Sector – Good Domestic Sales but Weak Exports
Motor vehicle sales domestically have continued strong, but demand from the U.S. has fallen off significantly. U.S. consumers are reluctant to spend due to weaker job prospects, more restrictive credit, high gasoline prices and falling house prices.

In recognition of these factors, Canadian auto producers have been striving to reduce their inventories, mainly through incentive selling packages. Vehicle production in this year’s first quarter was also held back by a strike at a major U.S. auto parts producer. The overall effect of lower auto production in Canada had a ripple effect on the total economy through less inventory accumulation, reducing activity levels in wholesaling and transportation and cutting into export sales.

Exports (-4.1%) and Imports (-10.0%)

Goods export sales also continued to struggle in the forestry sector as the woes in the U.S. housing sector continued. However, energy product exports recorded a strong gain due to the hike in the international price for oil.

Exports of services (-8.7% annualized) were down significantly due to fewer foreign visitors to Canada, particularly from the United States.

Canadian goods imports (-8.2%) were down mainly because this nation’s auto sector did not import as many parts in the latest quarter as in Q4 07, partly due to the strike in the U.S. and partly due to lower production.

Personal Consumption Expenditures (PCE) (+3.2%)
As for the personal consumption component (+3.2%) of GDP, purchases of new and used vehicles in Canada were quite strong (+7.2%) due to discounts, low financing charges and the cuts in the Goods and Services Tax (GST). Also, expenditures by Canadians traveling abroad were almost at record levels. Nevertheless, this was a decline from the previous quarter, partly explaining the -18.0% figure for services imports.

Other Highlights
Some of the other highlights from Statistics Canada’s latest GDP report include the following:

Corporate profits before taxes grew 2.4% in the quarter, or about 10% on an annual basis. This gain was largely thanks to earnings in the energy sector. However, bank profits weakened in the quarter and manufacturers recorded profit declines.

Household debt increased slightly to stand at $1.16 for every $1.00 of disposable income. About 8% of personal disposable income goes towards servicing household debt.

Within the service sector, activity levels in “finance and insurance” have come alive lately due to strong trading volumes on the stock exchanges.

In residential investment (-6.8%), multi-unit work and renovation activity saw increased spending in the first quarter. However, these gains were exceeded by the drop in single-family housing investment.

In non-residential investment (+3.5%), there were increases in both building work and in engineering. Non-residential investment has resurfaced into positive-growth territory after four quarters spent in decline. Last year was a good year for construction starts according to CanaData and this is now paying off in terms of job-site activity levels.

Machinery and equipment investment fell back in the first quarter of this year after double-digit annualized levels of growth in the three preceding quarters. Statistics Canada records that “business investment in machinery and equipment has increased by more than 60% since the fourth quarter of 2002, in conjunction with the appreciation of the Canadian dollar.” At present, however, corporations are playing it cautious with some spending plans as there has been an expectation that business would slow down this year.

Final domestic demand in Canada, which excludes foreign trade and inventory adjustments, was at its lowest level in several years in Q1 08, but was still reasonably positive at +2.3%.

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