Economic flat spot points to rate cut, economists say

Canada’s economic growth seems to have hit a plateau earlier this year, with trouble in sight. StatsCan reported Monday morning that GDP growth for May was flat. Coming on the heels of two straight months of just 0.1% growth, the flat spot is raising some eyebrows.

“In its July monetary policy review update, the Bank of Canada assumed that GDP growth would average 3.2% during the quarter,” said Mark Chandler, senior financial markets economist at Scotia Economics capital markets research, in a report out of Scotia.

“With a September rate hike already off the table, today’s report calls into question whether there is any desire in Ottawa for another possible move in October or December,” he said.

The GDP growth estimate among economists had predicted growth of 0.3%, according to Chandler.

“It looks like David Dodge put away the Bank of Canada’s rate hike weapon none too soon,” said CIBC World Markets senior economist Avery Shenfeld, in a research note. “Only a boost in public sector activity tied to census-taking kept Canadian real GDP from an outright decline.”

In fact, business sector output was in negative territory at -0.1% growth in May, led by declines in the energy sector, which marked a contraction of 1.5%. Declines were not limited to the energy sector, as mining saw output drop 2.4%.

“We can’t see weakness in crude materials output as a lasting feature with world demand firm and prices highly elevated,” Shenfeld said. “Certainly, all the capital pouring in to oil sands investments and in M&A action in the mining sector points to growth opportunities ahead.”

That’s an opinion shared by The Conference Board of Canada, in its Provincial Outlook. In the report, the think tank predicts high energy prices will remain the norm for at least the next five years, maintaining Alberta’s place as the top economic performer.

The province is expected to post growth of 6.6% for 2006, while 2007 should see real GDP growth in excess of 4.0%.

“Among Canadian provinces, Alberta is in a league of its own,” said Marie-Christine Bernard, associate director, Provincial Outlook. She calls high oil prices “a more permanent structural change, which is acting as a magnet for workers from other provinces.”

While workers continue to be attracted to Alberta in search of their share of the energy boom, labour demand is expected to remain stronger than population growth, and could stifle key industries. Real estate prices in the west are already soaring; the tight labour market is seen to be driving construction costs even higher.

The resource boom is expected to fuel economic growth in Newfoundland and Labrador as well, with growth hitting 4.6% for 2006 and 2007. But the Conference Board warns that the build-out of the province’s two largest resource projects — Voisey’s Bay and White Rose — tends to mask more serious economic problems, including a declining population, high unemployment and weak consumer spending.

Strong construction activity in Manitoba is expected to drive growth in that province to 3.7%, placing it third for 2006. The fickle nature of the resource market will boost British Columbia’s economy by 3.6%, while slow demand for Saskatchewan’s mining sector will limit growth there to 2.5%.

The strong Canadian dollar will continue to dog provinces with a manufacturing bias, but domestic consumption in Ontario and Quebec should sustain real growth rates of 2.5% and 2.1%, respectively.

In the Maritimes, real GDP growth will remain below 3% across the board, with Nova Scotia expected to see 2.7% growth, New Brunswick seeing 2.2% and Prince Edward Island home to 2.1% growth.

On a national scale, economic growth is likely to remain sluggish for 2006, according to CIBC’s Shenfeld.

“Even allowing for a healthy 0.5% June rebound, Canada’s economy looks to seriously disappoint, with real growth just under 2%,” he said. While he admits that a reversal in monetary policy could come sooner than expected, he stands by his earlier prediction that the Bank of Canada will cut interest rates in the first quarter of 2007.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(07/31/06)

Steven Lamb