Household spending and business
investment may help restart Canadian growth after the economy
shrank in the second quarter, according to investors and
Domestic spending accelerated from April to June, with
gains in every major component, even as exports were disrupted
by natural disasters and factory shutdowns, which led to the 0.4
percent annualized contraction reported yesterday by Statistics
Canada. All 15 economists surveyed by Bloomberg after the data
were released said they still expect the economy to expand in
the third quarter, averting a recession.
“It’s going to be a bumpy ride, but we are going to be
able to pull through,” said Arlene Kish, an economist at IHS
Global Insight in Toronto. “As long as people focus on job
growth, that’s going to limit any downtick in consumer
Domestic strength has helped insulate Canada from weakness
in demand coming from other Group of Seven countries since the
2008 financial crisis. Canada has also avoided bank collapses
and posted the G-7’s smallest budget deficits, helping to
support consumer and business confidence.
In the past half century, Canada has never posted back-to-
back declines in quarterly output when domestic spending has
risen, according to Statistics Canada data.
“As long as the domestic economy is continuing to grow,
it’s often been the case that overall weakness in GDP doesn’t
persist,” said Paul Ferley, assistant chief economist at Royal
Bank of Canada in Toronto. Even the second-quarter drag from
trade was linked to “transitory factors” that should reverse,
Automobile production fell an annualized 6 percent in the
quarter as Japan’s earthquake and tsunami disrupted supply
chains. Production may rise later this year at companies such as
Calgary-based Imperial Oil Ltd. after refinery shutdowns due to
maintenance. Wildfires in Alberta in May also led oil producers
such as Cenovus Energy Inc. of Calgary to cut output.
The currency was little changed at 97.77 cents per U.S.
dollar, and bond yields rose as investors pared bets the economy
will slow. By contrast, the currency fell 1.2 percent to a
three-month low in March 2009 when Statistics Canada reported
the economy shrank at the end of 2008, marking the start of the
Final domestic demand, which excludes inventories, imports
and exports, grew by 0.7 percent after a 0.5 percent increase in
the first quarter, Statistics Canada said. Consumer and
government spending both increased 0.4 percent, while fixed
capital investment rose 2 percent.
The quarter ended with growth of 0.2 percent in June, the
first gain in three months, led by retailing and oil and gas
“The good handoff from June suggests a rebound in the
third quarter,” Krishen Rangasamy, senior economist at National
Bank Financial, said in a telephone interview from Toronto.
“Final domestic demand itself was very solid. In any other
environment that would be supportive of Bank of Canada rate
Mark Carney, head of Canada’s central bank, has kept his
key lending rate at 1 percent since September. None of the 17
economists surveyed by Bloomberg Aug. 22 to Aug. 29 are
predicting an increase at his next announcement Sept. 7. Carney
told lawmakers Aug. 19 that investment and consumption will lead
an economic recovery in the second half of this year. Carney
also said economic “headwinds,” including the European debt
crisis and the Canadian dollar’s rise against the U.S. dollar,
had increased. The Canadian dollar touched 94.23 cents per U.S.
dollar July 21, the strongest since November 2007.
Calls for Stimulus
The report led to renewed calls from opposition lawmakers
for increased stimulus. Interim Liberal Party Leader Bob Rae
said yesterday his party will focus on “jobs, jobs, jobs” when
Parliament resumes Sept. 19, because Prime Minister Stephen Harper’s Conservatives are too concerned about cutting spending.
Finance Minister Jim Flaherty rejected that notion, telling
reporters in Toronto “we have to stay the course” and maintain
“our plan to return to balance to support our recovery.”
The labor market remains one of Canada’s biggest advantages,
with unemployment falling to 7.2 percent in July from a peak of
8.7 percent in August 2009. In the U.S., lawmakers and Federal
Reserve officials have debated adding new stimulus to tackle a
jobless rate that has exceeded 8 percent since February 2009.
Scotia Capital economist Derek Holt, who forecast the
contraction and who predicts no interest rate increases “for at
least the next year or so,” said the rebound may be limited
because Canadian companies will need to work off the large
amounts of inventories they built up in the second quarter.
“The bigger question mark is what happens in the fourth
quarter and first quarter of next year in terms of loss of
momentum in the U.S. economy and how that further spills into
Canada,” he said.
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