May 7, 2008

Economic Growth

Canadian economy shows signs of recession

Richard Gilbert

staff writer

The Canadian economy showed signs of entering a recession in February, while the construction sector experienced low rates of growth.

Economic activity in Canada declined 0.2 per cent in February, according to a report released by Statistics Canada on April 30.

“After having recorded a significant decline in December (-0.7 per cent) followed by a near-complete recovery in January (+0.6 per cent), Canadian economic activity fell for the second time in the last three months of data,” the report said.

An economist at the TD Bank explained how February’s GDP data reveals the composition of growth and weakness in the Canadian economy.

“In the current cycle defined by the U.S. downturn, weak spots are typically concentrated in export-oriented manufacturing sectors, whereas domestic demand shoulders most of the growth” said TD economist Pascal Gauthier.

“As in previous months, goods production was down (-0.2 per cent). Manufacturing activity recorded another important decline (-0.7 per cent) spread across 16 of the major 21 manufacturing groupings. The only goods-producing industry to record a gain was construction.”

Gauthier said the performance of the construction sector was due to a surge in housing starts in February. Construction is also dependent on domestic demand for growth.

According to Statistics Canada, the key sectors of decline in February include; mining and oil and gas extraction (-0.6 per cent), wholesale trade (-1.4 per cent), retail trade (-0.6 per cent), and transportation and warehousing (-0.5 per cent).

The Royal Bank of Canada said that despite the contraction of the economy in February, Canada’s economy likely grew modestly in the first quarter.

“Today’s report poses some downside risk to our forecast that the economy grew at a 1.2 per cent annualized pace in the first quarter,” said Dawn Desjardins, RBS senior economist.

Based on the performance of the economy in February, Gauthier said it now looks likely that Canadian real GDP grew by less than 0.5 per cent (annualized) in the first quarter of 2008.

“While this is certainly better when compared to our March forecast of a 0.4 per cent contraction, this does not mean we’ve escaped the worst of it, said Gauthier.

“In all likelihood, the knock-on effects from the U.S. slowdown are only beginning to be felt”.

Gauthier also pointed out that the U.S. economy currently shows no sign of bottoming out.

According to advance estimates released on April 30 by the Bureau of Economic Analysis, real GDP in the U.S. increased at an annual rate of 0.6 per cent in the first quarter of 2008.

“As expected first quarter growth was slow. The numbers reaffirm the importance of continuing immediate and long term efforts to strengthen our economy. The President took quick action to jumpstart our economy by advancing bipartisan economic stimulus legislation in February,” said Carlos M. Gutierrez, U.S. commerce secretary. “Many Americans have begun to receive their tax rebates and more checks will go out in the weeks ahead. Over the coming months, analysts forecast the more than $150 billion in tax rebates and business incentives will provide a real boost to our economy by putting money back in the hands of workers and businesses.”

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