Economy struggled in May

Canada’s GDP contracted by 0.5% in May, posting a slightly worse performance than the 0.3% contraction analysts had predicted. The malaise in the goods-producing sector led the decline as manufacturing activity dropped by 1.6% in May. With the Canadian dollar at its highest point since October 2008, recovery in manufacturing could be held back.

The petroleum sector was also responsible for holding back the economy. Output in the sector dropped by 2.3%, the fourth consecutive month in which activity among energy firms slipped in Canada.

According to Statistics Canada, year to year, that portion of Canada’s GDP attributable to oil and gas production was 8% smaller in May 2009 compared with production in May 2008.

Of all the segments that Statistics Canada follows, only five sectors posted gains in May: non-durable manufacturing (0.2%), healthcare (0.2%), real estate and finance (0.4%), retail (0.6%) and government administration (0.1%).

An economic report by CIBC said the reopening of auto plants and the rebound in U.S. demand fuelled by inventory rebuilding will kick-start some growth in Q3. However, the persistence of weak demand both at home and abroad will continue to pull down overall growth. June’s GDP is slated to drop. The report projects a drop of more than 3% in Q2.

Despite the gloomy news, 80% of Canada’s CEOs expect that the overall economic conditions will either improve or remain the same over the next 12 months, according to The Executive Committee Index (TEC) 2009 Q2 report.

“The confidence index rose a dramatic 22 points last quarter, rebounding in one period to a near match to the index of one year ago,” said Catherine Osler, president of TEC Canada. “Every component of the index grew with the strongest gains in the area of expected improvement in economic condition. These results, the highest in the past 24 months, demonstrate significant optimism in the current business environment.”

The TEC confidence index is built on the results of a poll of CEOs nationwide on current economic trends and issues affecting today’s small to mid-size business climate.

Other results from the poll also showed that 78% predict their firms’ revenues will either increase or remain the same over the next 12 months, with 77% expecting their firms’ profitability to improve or remain the same. And 84% are also anticipating an increase in the number of employees in their firms or no movement for the balance of 2009.

However, the TEC executives also have concerns, the top four being economic uncertainty, financial issues — specifically, financing, cash flow and profitability — slow growth and staffing.

South of the border, the Q2 economic report for the U.S. has dimmed any hopes of a quick recovery. Although annualized 1% GDP contraction was better than the 1.5% contraction many economists expected, consumer confidence appears frail amid news of further job losses and the gloomy housing market.

Bart Van Ark, chief economist at The Conference Board, said Q2’s data suggest that a V-shaped recovery is unlikely and that further contraction could be expected through Q3.

“Consumer spending came out worse than expected and is likely to remain weak into the third quarter because of ongoing clogging in income and credit channels,” said Van Ark. “The very rapid decline in inventories raises hopes for a recovery in industrial production, but also increases chances of a pushback later in the year as domestic and global markets remain weak. With capital spending still falling and unemployment rising, neither investors nor workers are likely to see strong rewards any time soon.”

(07/31/09)