According to Statistics Canada’s latest report, real (i.e., inflation-adjusted) Gross Domestic Product (GDP) growth in Canada, quarter to quarter at an annualized rate, was only 0.3% in the most recent April to June period. This follows on the heels of a -0.8% figure in the first quarter and +0.8% in the fourth quarter of last year. In other words, the economy has been stalled for the last nine months. Nor is there much prospect that this will not extend to a full year during the next quarter.

Foreign Trade Disparity
A quick look at the charts that accompany this article would lead to the conclusion that where Canada particularly fell down in the latest quarter was in foreign trade. Canada’s exports declined (-6.5% annualized) while imports increased (+3.2%). By way of contrast, the picture was the opposite south of the border. The U.S. economy grew robustly in the latest quarter partly because its export sales increased at a rapid rate (+16.6%) and its imports moderated significantly (-7.6%).

The foreign trade positions of the two countries are not the whole story, however. The U.S. received a shot in the arm from federal government rebate cheques. Just the same, Canada (+2.4%) outperformed the U.S. (+1.7%) in terms of consumer spending. Much of the bonus money that American citizens received was used to pay off debt. In both countries, consumer spending on durable goods (i.e., automotive products) was weak, with Canada at -1.2% and the U.S. at -2.5%. Non-durables and services more than made up the difference.

An Especially Weak Performance in Investment
What might have been most disappointing for Canada was that not one of the three major investment categories recorded an increase in the latest quarter. Residential spending was down 3.9%, non-residential spending on structures was -1.7% and machinery and equipment expenditures were -1.2%. Residential investment in Canada has been weak for two quarters now, with the prospect of further fall-offs to come as housing starts recede this year and next year.

In its GDP report, Statistics Canada points out that residential renovation spending in the latest quarter declined for the first time since third-quarter 1999. Canadians should still count their blessings, however. Residential investment in the U.S. has been negative on a quarter-to-quarter basis for the past two-and-a-half years. The magnitude of the U.S. decline is starting to ease and when this crosses over into positive territory again, it will contribute significantly to a pick-up in overall growth south of the border.

U.S. Outperforming Canada in Non-residential Construction
The U.S. has considerably outperformed Canada in the area of non-residential investment for the past six quarters. This latest quarter was a further example of the disparity, with the U.S. at +13.7% and Canada at -1.7%. High world energy prices have not had an immediate impact on engineering construction because much of this work has been constrained by material and labour shortages, by time delays required for environmental approvals and by uncertainty with respect to future carbon emission standards.   

As for non-residential building construction, several significant categories that should be proceeding full steam ahead, for this stage in the cycle, have been held back by exogenous variables or concerns about the state of the world economy. For example, hotel construction, which has been booming in the U.S., is considerably more relaxed in Canada due to fewer U.S. visitors. Americans have been discouraged from traveling outside their country by high fuel costs and a more rigorous documentation process designed to blunt the terrorist threat.

Canada’s manufacturing sector is holding off on investment until the loonie settles down within a more predictable range. Retail construction spending is taking note of the pause that is coming in employment prospects as a result of the slowdown. Even institutional construction has not been as expansive as in earlier periods, when interprovincial population shifts were more pronounced and residential construction was more buoyant. CanaData’s non-residential building starts offer confirmation of these trends, recording a 25% decline in square footage in the first half of this year versus the same period last year.

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