Recovery from the recession is slowing quickly in North America, as weakness in the United States threatens to spill more into Canada.
The Canadian economy grew 0.1 per cent in May, according to new data from Statistics Canada, slower than expectations of 0.2 per cent. Natural resources – mining, oil and natural gas and forestry – were strong.
In the United States, gross domestic product for the second quarter was 2.4 per cent, less than the projected 2.6 per cent. The increase was largely due to government spending and businesses rebuilding their inventories, while consumer spending remained weak.
The primary risk to Canada of a U.S. slowdown is the export market. While Canada's reliance on the U.S. has lessened, weakness south of the border quickly spreads north. A worrisome factor for the future is that the rate of GDP growth in the U.S. is not strong enough to bring down persistently high unemployment. Joblessness has quelled consumer confidence – and lack of consumer spending was noted in the second-quarter GDP result.
“The U.S. doesn’t show a lot of underlying strength or momentum,” said economist Sal Guatieri of BMO Nesbitt Burns in Toronto. “Our economy should continue to move forward, at least at a modest clip. But the shaky U.S. recovery is a worry. If the U.S. recovery stalls, Canada’s exports could head south and slow our economy even more.”
Even though the Canadian economy was not as strong as expected in May, economists said the second quarter as a whole should still look good, and expectations of additional Bank of Canada interest rate increases remain in place.
National Bank Financial pointed to the notably strong job creation in the April-June period, when 225,000 jobs were added to the economy, predicting 3 per cent growth for the quarter, in line with Bank of Canada expectations.
At CIBC World Markets, economists expect 2.6 per cent growth for the second quarter and maintained their forecast of two more increases, at one-quarter of a percentage point each, in the Bank of Canada’s benchmark overnight rate. That would push the rate to 1.25 per cent. The current 0.75 per cent was set July 19, when the central bank unveiled a 0.25 percentage point increase, its second during the recovery.
“While Q2 started slowly, it’s too early to write off the quarter,” said CIBC World Markets in a report on Friday. “Further Bank of Canada rate hikes are in the cards.”
Canada’s strength in May in natural resources is evident at Port Metro Vancouver, where business in the first half of the year has been buoyed significantly by export gains in coal, forestry and potash. As well, traffic of imported containers fully loaded with goods – an indicator of stronger consumer spending in Canada – is up 27 per cent.
“Significantly improved half-year results are good news for all Canadians,” said Robin Silvester, president of the port, by far Canada’s largest.
Where Canada was weak in May was in construction, which fell 1.6 per cent, Statistics Canada said, and wholesaling activity, which was down 1.8 per cent.
Worry about the economy in the U.S. is far greater. Peter Morici, a business professor and a bear on the economy, predicted another recession by the end of the year, the feared double dip.
“Unless spending picks up, and indicators are that is not happening, once businesses stop piling up unsold goods, layoffs will outnumber hires, unemployment will rise with a vengeance, and the economy will head into a second dip,” said Mr. Morici, a professor at the University of Maryland business school.
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CANADIAN SNAPSHOT
+3.4%
Mining, oil and natural gas were strong in May, with Statistics Canada reporting that the output of copper, nickel, lead and zinc all rose significantly. While the price of oil fell sharply during May, it was still higher than a year earlier.
+7.7%
Forestry, so long mired in a depression, had a rare great month in May. The price of wood rose through the spring and although it began to drop in May, foresters were able to cash in and produce profits long absent.
-1.6%
Construction was a glaring weak spot in the May gross domestic product numbers from Statscan. Residential building construction was down 3.8 per cent, although non-residential construction rose 0.8 per cent.
David Ebner
