August 5, 2011 – Weekly Market Update
The Economy is Still Fragile – thankfully the US government seems to have resolved their debt ceiling dispute which was causing economic concern around the world. As you can see by the article below, Canada’s economic stability is still tenuous. The good news is that the spring slowdown in economic growth is predicted to be temporary. The other good news is that interest rates will likely stay low for a while longer, keeping housing affordable.
May Brings Showers – Dan Sumner, Economist TD Economics
Although it had been widely expected that the Canadian economy would pull back in Q2, preliminary indications are looking even more negative than the market predicted.
Canadian gross domestic product – the principle measure of overall economic activity – shrunk by 0.3% in May. That’s the largest monthly decline since May 2009, when Canada was mired in recession. The reading was much worse than the +0.1% growth called for by a consensus of economists, and signals that after expanding by 3.9% in Q1, the Canadian economy has really slowed down in Q2.
Although GDP information at the provincial level is only available on an annual basis, considering the largest driver to the downside at the national level in May was the mining, oil and gas extraction sector, the report doesn’t look good for Alberta. GDP in that sector plummeted 5.3% in May; however, the decline appears to largely be due to temporary factors like the slow spring beak up and wildfires in northern Alberta.
Other sectors dragging on economic growth in Canada in May were manufacturing and construction, while most service sector industries expanded during the month.
This morning’s report definitely surprised the market to the downside and taken along with the pull back in inflation observed last week, leaves room for the Bank of Canada to keep rates unchanged at its next meeting on September 7. However, as is often the case with monthly statistics, the overall trend in the Canadian economy appears to be clouded by one time events in this report.
The Canadian oil industry (and the resource sector in general) is an engine of growth in the Canadian economy right now, and over the next month or two, GDP will probably bounce back as the temporary factors weighing on GDP in May dissipate.
