Anyone who has spent a few years in Canada is well aware that at the end of the long and hard winter, you can't expect spring to just burst out in full bloom in April. We'll find out this week if the same goes for Canada's economy.
Statistics Canada reports the country's gross domestic product for April on Tuesday, a key update on the state of an economy that is coming off three straight months of contraction. March's 0.2-per-cent decline in GDP capped a dismal winter, in which the Canadian economy was stalled by harsh weather, a slowdown in its critical U.S. market and a severe oil price shock that crippled one of the country's biggest industries and hamstrung some of its key regions.
Observers are looking for something better from April, with the worst of the winter past, the U.S. port disputes resolved and oil prices in recovery by that time. But the mixed bag of economic indicators for the month that have come out in recent weeks suggest that some of the weakness of the first quarter has spilled into the second quarter.
Most economists estimate that the Canadian economy grew by about 0.1 to 0.2 per cent in April. While that would be the first monthly growth since December, it would, at best, merely make back what the economy lost in March. This anticipated tepid start to the second quarter has many forecasters now predicting GDP growth of less than 1 per cent annualized for the quarter as a whole (which ends June 30) – a far-from-convincing turnaround from the economy's bleak 0.6-per-cent annualized contraction in the first quarter. There's little margin for disappointment in the numbers before we could be facing a second consecutive quarterly GDP decline – the traditional technical definition of a recession.
"GDP numbers are usually market movers, but this one is special," said Benjamin Tal, deputy chief economist at CIBC World Markets, in a research note last week. "A negative number, and people will start whispering the R-word while aggressively pricing in another rate cut by the Bank of Canada. And while the market expects a better number, there is little conviction behind that consensus."
Hopes for a more substantial rebound have been chilled by disappointments in three key April economic indicators: Retail sales, manufacturing and trade.
Retail sales fell 0.1 per cent in April from March, a slowdown that caught the markets by surprise after the retail sector had been building momentum as the winter progressed. In volume terms, once price changes were removed, retail sales looked even worse in the month, off 0.2 per cent.
Manufacturing, a sector that had been expected to be a leader in Canada's economic recovery this year, instead extended its early-year stumbles in April, with sales slumping 2.1 per cent from March. And the country posted a $3-billion trade deficit in the month, its second-biggest in history (exceeded only by March's $3.9-billion shortfall), amid the fourth straight monthly decline for exports – another economic segment expected to do the heavy lifting this year. April's export declines had nothing to do with the beleaguered oil and gas sector: Non-energy exports slipped 0.9 per cent in the month, even as energy exports recovered modestly.
In a press conference this month, Bank of Canada Governor Stephen Poloz cautioned that the factors that dragged the economy down in the first quarter almost certainly didn't disappear just because the calendar flipped over to April.
"This horrible winter that we had didn't end on March 31. There may be weather effects throughout the data that go longer, possibly into the second quarter," he said.
In addition, some of the large-scale retooling shutdowns in the first quarter in the auto sector – which accounts for a large portion of Canada's manufacturing and exports – continued into the second quarter, and likely contributed to April's sluggish manufacturing and trade data. With those plants now up and running again, the auto sector could rebound in subsequent months.
And not all the news has been bad in April's economic indicators. Wholesale sales surged 1.9 per cent from March, much more than experts had estimated. And Statscan's Survey of Employment, Payrolls and Hours – the statistical agency's most thorough monthly labour market survey, released last week – indicated that the country's employers added a solid, if unspectacular, 16,000 jobs in the month.
Meanwhile, the improvement in oil prices in April should provide a source of strength in the GDP numbers. The energy sector accounts for close to 10 per cent of GDP, and it showed signs of turning a corner: Energy exports rose nearly 6 per cent on a seasonally adjusted basis from March, their biggest monthly gain in nearly a year.
However, economists warn, a modest improvement in oil prices doesn't signal, by any stretch, that the oil shock is now in the Canadian economy's rear-view mirror.
"This hasn't improved the sombre mood of producers, who still plan to slash jobs and investment in the oil sands by 30 per cent to 40 per cent this year," noted Capital Economics economist David Madani. "With the hit from falling energy investment only just over a quarter done, it's clear that this downturn is far from over."