Big-bank economists not impressed by Canada’s GDP stats

(July 30, 2003) The outlook for the Canadian economy is flat for the second quarter, according to economists at the big banks. And usual suspects — severe acute respiratory syndrome (SARS), mad cow disease and the soaring Canadian dollar — are catching the blame for this underperformance.

The Canadian economy grew in May by 0.1%, beating some estimates that there would be contraction of 0.1%. There was growth in the retail sector, thanks to continued incentives in the auto market, and the wholesale sector benefited from an increase in imports.

One of the more surprising figures for May was the rebound of 0.8% in the hotel and food services industry, as the fear of SARS seemed to wane slightly.

But the Canadian economy relies on exports far more than tourism.

Weakness was found in the manufacturing sector, particularly in the meat processing industry, as the U.S. and 33 other countries upheld their bans on Canadian beef following the discovery of a lone case of mad cow disease in Alberta. Durable goods activity was down 0.6%, which was blamed largely on the high dollar valuations.

Economists at the major banks were quick to point out that if the stats for June don’t show a major expansion, there is a chance the economy will slip into contraction for the second quarter. These numbers will not be available until the end of August.

“Today’s report points to a likely flat outcome for second-quarter gross domestic product (GDP), with some minor risk of an outright contraction should activity in June fail to deliver,” says Carl Gomez, economist at RBC.

He was not alone in this prediction, as Sherry Cooper, chief economist at BMO Nesbitt Burns, also says a strong June performance will be the only way to save Q2 growth.

“The combination of the April setback and the modest gain in May suggests that GDP for all of Q2 will be close to unchanged, with a lingering possibility of an outright decline, unless activity surged in June,” says Cooper.

Even if SARS and mad cow cease to be factors weighing on the economy, there is still the effect the high dollar has on the ever-important export industry, according to Derek Burleton, senior economist at TD Bank.

“Even though the recovery from the SARS’s painful effects likely picked up steam in June, nothing more than a flat showing for Canadian real GDP in the second quarter appears to be in store,” says Burleton.

“We still see the second half of this year being a difficult grind,” he says. “One negative influence is unlikely to diminish any time soon — namely, the net drag exerted on Canada’s heavily export-oriented economy from this year’s double-digit appreciation of the loonie.”

Burleton predicts that until the U.S. recovery hits its stride, Canadian GDP is not likely to match the rosy predictions that seemed so plausible at the beginning of the year.

“Look for growth rates in the order of 2% at annual rates until early 2004, when a more hearty expansion is expected to emerge.”

Filed by Steven Lamb, Advisor.ca, slamb@advisor.ca.