Canadian Economy Shrinks But Rebound Expected

–Canada’s Economy Goes Marginally Negative in Q2
–Domestic Economy Strong But Dragged Down By Weak Exports
–Analysts See Q3 and Second Half Recovery

By Courtney Tower

OTTAWA (MNI) – Canada’s economy went marginally negative in the
second quarter this year, for the first quarter since the 2008-2009
recession, while analysts and Finance Minister Jim Flaherty said the
domestic economy remained strong but weak exports were the culprit.

Gross domestic product declined 0.1% in the second quarter,
following a 0.9% increase in the first quarter. GDP fell at an
annualized rate of 0.4% in the quarter, following a 3.6% gain in the
first quarter. The result reflected weakness in U.S. and European demand
for Canada’s exports, which suffered an 8.3% annualized decline in the
quarter and shaved off a large 5.7 percentage points from the quarter’s
growth rate.

Imports, instead, benefitting from the strong Canadian dollar where
exports were hurt by it, rose by 10.0% on an annualized basis. The C$
boosted demand in Canada for foreign capital investment goods. Business
investment grew by 15.5%. Consumer spending posted a 1.6% annualized
gain. Final domestic demand rose at a strong 3.0% annualized rate in the
second quarter, following a 1.8% rise in the first quarter.

Statistics Canada in its GDP report highlighted the temporary
nature of many of the declines and analysts later said the June
month-over-month gain of 0.2%, ahead of market expectations, had set the
stage for a third quarter rebound. There were 0.2% gains in both
goods-producing and services-producing sectors.

Temporary factors cited included maintenance shutdowns and forest
fires tempering a low 0.7% increase in mining and oil and gas
extraction, and the Japanese supply disruptions dampening automobile
production. The shutdowns are over, the fires moderating. Transportation
and warehousing services fell 1.1%, which Statistics Canada attributed
to the now-settled Canada-wide postal strike.

According to analysts at Canada’s largest commercial bank, Royal
Bank of Canada, the current volatility in financial markets, because of
worries about the global economy, provides a downside risks to Canada’s
prospects. But RBC noted that the Bank of Canada seems “prepared to
maintain the (policy) overnight rate at its current highly
stimulative1.0% to mitigate these risks.”

“The low level of interest rates combined with a well-functioning
financial system means that financing for both households and businesses
will remain affordable and will be a key support to the economy
reaccelerating in the second half of the year,” Dawn Desjardins,
assistant chief economist at RBC, said.

Canadian exports will follow growth in the United States, Desjardin
said. And “the reversal of temporary factors and low interest rate
backdrop support our view that third quarter 2011 growth will prove much
stronger than the second quarter’s tepid pace.”

Diana Petramala, economist at TD Economics, saw new growth in the
second half but a rebound that “will not be robust.” She expected the
current financial turbulence “to weigh on business and consumer
confidence and pull some of the steam out of domestic spending.”
Although temporary factors are reversed and the improving labor market
helps support moderate household spending growth, U.S. and global growth
are down to “a crawl,” inhibiting Canadian growth “to a quarterly pace
of 1.5% over the next three quarters,” she said.

Petramala sees the Canadian economy growing by 2.4% on an average
annual basis in 2011, less than the Bank of Canada has expected, and
that, therefore, “the central bank is unlikely to resume with rate hikes
until above-trend Canadian economic growth is assured.”

Finance Minister Jim Flaherty, meanwhile, issued a statement
shortly after the Statistics Canada report came out, saying that “the
Canadian economy is still very fragile.” He said: “the global economic
recovery – especially in the U.S. and Europe – is fragile and growth
will be modest. ” However, “our domestic economy remains strong, with
consumption, and particularly business investment, continuing to
expand.”

** Market News International Ottawa **

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