August 28, 2013
Canada’s GDP growth to improve, but difficulties and uncertainties remain
In the recession year of 2009, Canada’s “real” (i.e., inflation-adjusted) gross domestic product (GDP) contracted by 2.7%.
Since then, the annual rates of change have been: 2010, +3.4%; 2011, +2.5%; and 2012, +1.7%.
For 2013, a figure of +1.8% appears about right; and for next year, 2014, +2.3%.
While there are several positives to cite concerning the Canadian economy at this time, there are also unresolved difficulties and uncertainties.
Among the pluses, total employment in the nation is now well ahead (+500,000) of its pre-recession peak reached in October 2008. In the U.S., the total jobs count remains short (i.e., -2.0 million) of that goal.
Canadian housing starts this year have been down versus last year, but not to the same degree as once feared. They have averaged nearly 185,000 units seasonally adjusted and annualized (SAAR), with a couple of months tracking close to the benchmark level of 200,000.
The federal government and the Bank of Canada (BOC) have been hoping that new and existing home prices would achieve a soft landing. Those government agencies have been looking in the wrong direction. So far, the price trend has stayed upward and the real estate sector has been a surprising source of strength.
Motor vehicle sales have been helping to sustain manufacturing activity levels, although not to the same stellar degree as in the U.S.
Retail sales in Canada are increasing on a year-over-year basis, but at a slower rate than south of the border. Canadian consumers have been laggards when it comes to addressing their debt problems. A period of belt-tightening in Canada has only recently gained traction as a priority.
In Statistics Canada’s July labour market report, employment in the public sector finally took a significant hit, -74,000 jobs, whereas positions in the private sector rose by 35,000. The latest month’s unemployment rate in Canada rose to 7.2% from 7.1% in June.
Canada’s relatively better performance during the recession caused an uncharacteristic gap in the jobless rate between the two nations. The U.S. number has now dropped to 7.4% and convergence is almost at hand.
On the downside, the softening in world trade, caused by the global financial crisis and sovereign debt problems in several Euro-zone nations, has been eroding support for both raw materials demand and commodity prices.
The clearest example of how much this has negatively impacted Canada can be found in North American stock market indices. Versus February 2009, the Toronto Stock Exchange (TSX) is +50%, but that pales beside the DJI and S&P 500, both of which have doubled.
NASDAQ’s index has forged ahead even more, +150%.
There is good news, finally, emanating from Europe. Second-quarter growth overseas was positive (+0.3% annualized) for the first time in several years. In Germany, the region’s undisputed growth leader, voters are expected to return Chancellor Angela Merkel’s ruling coalition to power in the upcoming election scheduled for September 22.
Nevertheless, the struggles of some so-called southern-periphery nations are not quite over. Greece, Italy, Portugal and Spain are likely to need further help in order to lessen their debt burdens.
It is encouraging to note that the austerity measures adopted by Athens are beginning to pay a dividend. Excluding interest on debt, the latest budget has crossed over into a minor surplus. In the private sector, labour costs have plummeted and tourism is booming.
China is said to be transitioning from an export-sales and infrastructure-building economy to one driven more by domestic demand. This shift may prove to be exaggerated. Once Europe is back on track, China’s exports will receive a prodigious boost.
Canada’s reliance on China as a customer is a good deal less than it is for some other natural-resource-based economies, such as Australia. The Canadian economy is still heavily dependent on how well the U.S. is performing.
But the traditional relationship between the two countries is undergoing some strains. The U.S. energy boom, brought on by new hydraulic fracturing technology, is reducing U.S. demand for natural gas from Alberta. “Fracking” is also adding to oil reserves.
As for U.S. oil imports, a more “strategic” product in a geopolitical sense, there is greater potential to reduce supplies from regimes other than Canada, such as OPEC and Venezuela.
President Barack Obama’s doubts about TransCanada’s Keystone XL pipeline expansion are worrying for executives in Canada’s oil patch. Contingency plans, such as moving more oil by rail and barge, reversal of Enbridge’s Line 9, and/or the Energy East pipeline proposal, are gaining more attention.
In 2014, as U.S. economic growth becomes more firmly grounded and Europe stirs again, providing lift for China as well, Canada’s trade prospects will improve.
The BOC continues to emphasize that there is a good deal of excess capacity in the system. This won’t disappear until mid-2015, at which time inflation will again rise to its target level of +2.0%.
The BOC’s key policy-setting interest rate (i.e., the “overnight” rate) will be kept at 1.00% for an extended period of time, providing significant ongoing monetary support.
But unlike the Fed and the Bank of England, the BOC is not engaging in an out-of-the-ordinary bond-buying program.
Instead, our federal government has chosen to pick up some of the stimulus burden by promising a $70 billion spending program for infrastructure spread out over the next ten years.
As the dollars flow, they will be enthusiastically welcomed by the design community, contractors and on-site workers.