The recently released statistics on the growth— or more accurately the lack of growth — of Canada’s gross domestic product (GDP) in May caused some analysts to, once again, start using the “R” (recession) word to describe the state of the economy.
However, when one takes a close look at all of the most recent key economic indicators, there are few signs that the economy has shifted into reverse or that the economic health of Canadians is deteriorating rapidly.
With respect to the economy’s overall performance, a decline in both residential and non-residential construction did contribute to the slight 0.1% month-over-month drop in GDP.However, a much more significant reason for the weakness in the month was a sharp drop in oil and gas extraction. Two factors were responsible for these reduced levels of oil production: (1) unacceptably high inventories brought on by milder-than-normal weather; and (2) the extended shut down of production facilities for maintenance.
During the remainder of the year, weak growth in the United States will probably continue to put a damper on demand for Canada’s manufactured exports; however, as the recent very solid 5% year-over-year increase in July motor vehicle sales indicates, Canadian consumers are still in reasonably good shape.
The reason for this disconnect between weak over-all GDP and consumers’ sustained financial health was recently highlighted by the C.D. Howe Institute’s Colin Busby in an article entitled “ Richer Than We Think: Why Canadians’ Purchasing Power Is Up While Economic Growth Is Down.”
Busby explains that a combination of a near-record low unemployment and rising real incomes has contributed to a sustained increase in consumer purchasing power.
Meanwhile, rapid growth of resource prices has driven investment and employment and, in turn, caused the Canadian dollar to appreciate.
This currency appreciation has, in turn, lowered import prices relative to the prices of export. As a result, Canada’s terms of trade have increased, bringing a parallel increase in the real purchasing power of consumers, one that should extend into 2009.
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