Economy loses steam, remains on track

The tenuous Canadian economic growth cycle has downshifted to its weakest quarter since recession, according to a new report from CIBC World Markets Inc.

The report expects Canadian real GDP to grow by only 1% this quarter before rebounding in the third and fourth quarters to the expected annual average of 2.7%, outpaced by the expected global growth of 3.8% in 2011.

“The train hasn’t come completely off the rails, but the global economy has seen some serious braking action in the first half of 2011,” says Avery Shenfeld, chief economist at CIBC. “We expect generally weak growth readings to roll out in the major developed economies for the next couple of months. Growth in the U.S. second quarter should, nevertheless, be no worse than Q1’s 1.9% disappointment.”

Shenfeld says a slowing domestic recovery means Canada is even more vulnerable to the ability of the U.S. economy to stay out of protracted trouble.

Some key data on the ground, however, provides hope for an improvement in coming months. Robust private sector hiring and the recent Manpower survey point to at least as good a performance in the quarter ahead.

That degree of confidence is more consistent with Q2 being a bump in the road rather than the start of something worse. As supply troubles related to the disaster in Japan begin to ease, Canada’s auto sector, with 21% expected growth in production, will help to lift the economy in the second half of the year, Shenfeld added.

“After a second half bounce, we expect Canada’s growth rate to settle back, leading the Bank of Canada to pause for three or four quarters after taking the overnight rate to merely 1.75% in early 2012,” he said. “Government spending will be slowing rather than propping up the economy, with as much as a half-point drag on the economy next year.”

Shenfeld says slowing housing starts means the construction sector will not fuel Canada’s economic growth as it did in the earlier part of recover, although he ruled out a U.S.-style crash.

Debt-ridden, thriftier consumers and high gasoline prices are bringing extra dead weight to Canada’s slowing economy.

“A highly leveraged consumer means that monetary restraint will pack a larger wallop than in the past, limiting the tightening dose that the Bank has to deliver,” said Shenfeld. “Along with a desire not to get too far out of sync with a stand-pat Fed, the need to avoid derailing the debt-ridden household sector will keep real overnight rates below zero even with the economy closing the gap to full employment.”

Poor weather also delayed some seasonal retail spending in April, a trend that likely extended into a soggy and chilly May. Agriculture was also impacted by excess rain in the Prairies.