June 5, 2008
Economic Snapshot - June 6, 2008
Does Canada really have a cold?
There is a saying that when the U.S. economy sneezes, the Canadian economy catches a cold.
Well, we may not have a cold, but the fact that Gross Domestic Product (GDP) shrank by 0.3% at an annual rate in the first quarter (a first since 2003) certainly suggests our economy has the sniffles.
In the first quarter, not only did the effect of weak U.S. demand contribute to a further softening in the volume of Canada’s exports, it also prompted manufacturers to supply “off the shelf,” which led to a sharp reduction in inventories.
According to Statistics Canada, the drop in exports to the U.S. in the first quarter was exacerbated by a strike at a U.S. auto parts supplier. In addition, abnormally cold weather in the first quarter contributed to weakness in residential construction.
Despite weak external demand and falling manufacturing output, domestic demand, which consists of consumer spending, business investment and government spending, continued to grow at a healthy pace, driven by sustained growth of employment, recent tax cuts and lower interest rates.
Looking ahead, the weak pattern of growth in the United States — attributable to the lingering impact of the sub-prime mortgage crisis and the recent erosion of discretionary consumer spending — will probably continue to depress Canada’s real exports over the remainder of this quarter and into the second half of the year.
However, the same factors that supported domestic demand in the first quarter, i.e., full-time employment growth, lower taxes, lower interest rates and low inflation, should continue to underpin GDP growth during the remainder of the year.
It is possible that overall GDP could shrink in the current (second) quarter, as a result of U.S. weakness. While this would technically be a “recession,” it is unlikely to be accompanied by the widespread rise in joblessness that has characterized previous major economic downturns. So the answer is yes. We may have a cold, but it doesn’t look like a bad one.
John Clinkard has over 30 years experience as an Economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada.
Canada vs United States Gross Domestic Product (GDP)
Data sources: Statistics Canada and U.S. Bureau of Economic Analysis.
Chart: Reed Construction Data - CanaData.
