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Canada’s Economy

General Angela Calla 2 Nov

Canada’s economy still sputtering

October 30, 2009

OTTAWA —Canada’s economy unexpectedly went into reverse again in August, adding new uncertainty about the strength and sustainability of the recovery.

The country’s real gross domestic product slipped 0.1 per cent in August — the first outright decline in three months — in a broad set-back led by oil-and-gas extraction, mining, utilities, mining and manufacturing.

The markets reacted strongly to today’s news, led by the Canadian dollar’s one-cent dive to the mid-92-cent level.

Economists said the negative reading, after a flat July that was not revised upwards as some had hoped, will make it very difficult for the economy to match the Bank of Canada’s newest forecast announced last week that growth would average two per cent in the third quarter.

With only the September data remaining, it would take a massive bounce to meet the expectation.

If it’s a recovery, “it’s a pretty wimpy start of a recovery,” said Scotiabank senior economist Derek Holt.

With the strong dollar likely having cut into exports and boosted imports in September, Holt said it is not beyond the realm of possibility that the quarter as a whole could turn in a negative performance — which would mean the recession, technically, did not end.

“I don’t rule out a negative (reading) at all,” he said.

That is still not the base-case scenario envisioned by economists, however. Most, including Holt, believe the third quarter will show modest growth, but not enough to boost confidence and far behind the 3.5-per-cent pace set by the U.S. for the corresponding period.

The two-country comparison appears to support a report by the Canadian Centre for Policy Alternatives this week that argued the United States had done a far better job of rolling out stimulus spending than Ottawa. The report estimates the President Obama administration has outspent the Harper government seven-to-one so far.

About half of the gross domestic product jump in the U.S. during the third quarter was attributed to the wildly popular cash-for-clunkers program and government incentives for new home buyers, both of which have ended.

“We now put more hope in a strong quarter four, but there is no doubt that the Canadian economy has been slower out of the recessionary gate that we had initially expected,” said Meny Grauman, an economist with CIBC.

Grauman said the Bank of Canada is now likely to keep interest rates at the lowest practical level of 0.25 per cent until the end of 2010, well beyond the conditional commitment of next summer.

That changes the picture of the loonie going forward and puts into question earlier expectations it would reach parity by the end of the year, and possibly rise above next year.

The August fall-back was almost entirely due to continued weakness in the critical goods producing part of the economy, with consumer-generated activity remaining strong.

Oil-and-gas extraction fell 2.3 per cent, as maintenance work at some crude petroleum facilities on the East Coast slowed production. Natural gas production also retreated.

The output of the mining sector excluding oil and gas extraction declined 1.4 per cent.

Manufacturing activity decreased 0.7 per cent, with eight of the 21 major groups retreating. Wholesale declined 0.5 per cent, reflecting weakness in foreign and domestic demand.

Meanwhile, retail sales increased 0.3 per cent, the public sector advanced 0.4 per cent, construction gained 0.2 per cent, and the level of activity of real estate agents and brokers remained high for a third straight month.

The output of utilities also rose, 1.8 per cent, as natural-gas distribution and the production of electricity increased.

The Canadian Press