Canada: No Longer Golden

Posted by David Rosenberg - Gluskin Sheff

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Read the Whole Rosenberg Commentary HERE

Canada’s Spectacular Performance: No Longer Golden

It’s official, Canada’s spectacular economic performance that spanned two quarters has ended.  Second quarter GDP moderated to just 2.0% QoQ SAAR (only four tenths higher than U.S. Q2 GDP growth!), missing our and the consensus estimate for a 2.5% increase.  It turns out that the BoC’s downgraded 3.0% estimate was too lofty as well (although, the Bank is probably thinking thank goodness they took their original 3.8% forecast from April down.)  While still impressive, Q1 GDP was taken down a few notches to 5.8% from 6.1%, adding to the overall negative tone of the release.

The details were very mixed to be sure.  Personal consumption expenditures slowed to 2.6% from 4.3%, the weakest in a year. Unsurprisingly, residential construction ground to a near-halt, up just 1.2% from 20%+ in the prior two quarters.  And this will likely be the best result for some time… the incoming data suggest the housing market will continue to deflate and in our view, residential construction will be a drag on GDP growth for at least two quarters.

There were certainly some positives from the business sector.  Non-residential construction actually managed to rise 1.0% after a six-quarter string of declines. Investment in machinery and equipment jumped by nearly 30%, which hopefully will translate into some positive productivity improvements down the road.

We saw more evidence of building inventories – the question for growth going forward is whether they were intended or not.  The build was so large in Q2 that inventories added 1.8 percentage points to the 2.0% headline number. Final sales (excluding inventories) were a paltry 0.2%, the weakest since Q2 2009.

Trade was a mixed bag as well with exports up 6% and imports up 16.4%.  Overall, net exports were a 3ppt drag on overall growth.

On a monthly basis, June GDP did okay, rising 0.2% MoM, improving on the April and May readings.  The hand-off to Q3 is decent and with some monthly growth, Q3 could come in at around 2.5%, which is slightly below the BoC’s 2.8% forecast (the downside risk is that we don’t get modest growth and in that case GDP will slip below 2%).  We will be watching inventories and housing especially for clues on Q3 growth going forward.

For the BoC rate decision next week, it certainly won’t be a slam dunk, especially after yesterday’s disappointing GDP report.  The fixed-income market is pricing in roughly 40% odds that they raise rates. Bay Street economists are more optimistic, collectively voting for a 25 bps increase (but not by a unanimous vote, with eight of 11 economists pencilling in a 25 bps increase).  If we had a vote, it would be for the BoC to stand pat next Wednesday, especially in light of a very benign inflation landscape and slowing economy.

Read the Whole Rosenberg Commentary HERE which includes the following:

•    While you were sleeping: today, equity markets are firm across the board; bonds, are selling off; adding to the pro-cyclical sentiment was the news that Australia’s economy expanded in Q2
•    Market comment: quite the session yesterday in the U.S.
•    FOMC minutes review
•    Frugality at its best
•    Quote of the day goes to … Alan Blinder
•    How bad is the U.S. jobs market?
•    Housing and jobs
•    It’s not Japan all over again?
•    You call this capitulation?
•    The visible hand: the two largest economies in the world are being sustained by the long arm of the law
•    U.S. consumers drawdown savings rate to spend; disinflation trend still intact
•    Canada no longer golden
•    More evidence that the loonie is overvalued
•    Housing prices in the U.S. — the last hurrah?
•    U.S. consumers feeling more confident
•    Why the U.S. may be contracting in Q3
•    Income theme intact

Read the Whole Rosenberg Commentary HERE