Canada's Housing Bubble

Jul 29, 2011 Jeremy Torobin theglobeandmail.com

The Canadian economy lost even more momentum in the second quarter than anybody feared, unexpectedly shrinking in May by the most in two years after stalling in April.

The country’s mining, oil and gas sector – a reliable source of strength for much of the recovery – had its biggest drop in activity since 1993, while manufacturing and construction also declined. All told, the economy shrank 0.3 per cent during the month, Statistics Canada said Friday.

That was the first monthly contraction since February and the sharpest dip since May, 2009, when the crucial U.S. economy was still in the grip of a recession that, according to revisions released Friday by the U.S. Commerce Department, was worse than initially thought.

Analysts were taken off guard by the Canadian report, having anticipated a slight gain in gross domestic product, and quickly started to revise their estimates for the annual rate of growth in the second quarter – to as low as a frighteningly anemic 0.5 per cent.

Economists and Bank of Canada Governor Mark Carney had long warned that the three-month period was marred by supply-chain disruptions linked to the Japanese earthquake and the dampening effect of high energy prices on consumer spending, but most had said second-quarter growth would be higher than 1 per cent even in a worst-case scenario.

Mr. Carney said in a forecast earlier this month that growth would “re-accelerate” in the second half of 2011, but that was before the possibility of a debt default in the United States or a credit-rating downgrade, or both, became more realistic.

While nobody can predict what the outcome of either would be, an increasing number of analysts and top U.S. policy makers warn that the hit on confidence in markets and among businesses and consumers could tip the world’s biggest economy back into recession.

“Canada’s economy was hit by one thing after another in the spring, and it now faces yet another hurdle from the deepening uncertainty emanating from the U.S. debt drama,” Douglas Porter, deputy chief economist at BMO Nesbitt Burns, said in a note to clients.

“While we believe that the most likely outcome is a mild pick-up in growth over the second half, the starting point is even weaker than we expected and there are still clearly plenty of potential dangers lurking ahead for the economy.’’

Total GDP in Canada was up 2.2 per cent from a year ago, Statscan said. Also, the drop in the mining and oil-and-gas sector was driven largely by bad weather and wildfires in northern Alberta and maintenance work on various projects, Mr. Porter noted. However, even without a 4.2-per-cent decline for oil and gas production and a 6.3-per-cent drop in mining, the economy would have barely grown, perhaps by 0.1 per cent, he said.

A growth rate of 0.5 per cent in the second quarter would be the weakest performance since the recession ended and would compare with a 3.9-per-cent annual pace in the first three months of the year. The Bank of Canada had been anticipating an expansion rate of 1.5 per cent in the second quarter, so the May report just adds to the reasons for Mr. Carney to keep interest rates low while the European and American debt dramas play out, economists said.

Manufacturing dipped 0.4 per cent in May, including a 0.5-per-cent drop at automotive companies, and construction fell 0.3 per cent, Statscan said.

Bright spots included wholesale trade, which grew by 1 per cent, and a slight gain of 0.2 per cent in retail. Output in the government sector was boosted somewhat artificially by the 2011 census.

“Economic growth should regain some speed in the second half of this year, supported by a rebound in global manufacturing as both the supply disruptions abate, and economic activity modestly improves in the U.S.,” Shahrzad Mobasher Fard, an economist at Toronto-Dominion Bank, said in a note to clients.

“Meanwhile, energy costs have started to ease, providing some additional support to household spending. Nonetheless, highly indebted consumers appear tapped out, and are not expected to contribute strongly to economic growth over the next few years.’’

Meanwhile, the U.S. economy – Canada’s main export market – grew at a slower-than-expected 1.3 per cent annual rate in the second quarter, Commerce Department figures showed Friday in Washington.

That was after a 0.4-per-cent gain in the first quarter, illustrating how dangerously close the United States has been to backsliding toward another downturn, even before the debt-ceiling impasse flared up into the current crisis.

Consumer spending, the lifeblood of the U.S. economy and, arguably, of the many Canadian manufacturers who export into that market, rose a paltry 0.1 per cent in the April-through-June period and will be squeezed over the next year or two amid government spending cuts.

Also, revised figures showed that the U.S. economy contracted 5.1 per cent from late 2007 to the second quarter of 2009, instead of the previously reported 4.1 per cent.