Saturday, August 1, 2009

Economic growth in Canada and the U.S.

Given the high debt loads of consumers and the continuing job losses in both the U.S. and Canada one wonders how there can be much growth in the near term. Although many firms have beat profit estimates this is usually the result of cutting costs rather than growth in business. However, China is growing at a fast clip so perhaps this will boost demand.

U.S. perks up as Canada slides back - August 01, 2009
Tony Wong
Business Reporter

The Canadian economy stumbled badly in May with businesses involved in energy and manufacturing leading the decline. But economists say the setback does not rule out a return to positive growth in the third quarter.

"The deep decline appears to fly rather rudely in the face of recent chatter that the recession was ending," said BMO Capital Markets economist Douglas Porter. "The Canadian economy will need to crawl out of a deeper hole."

Canadian gross domestic product fell by 0.5 per cent in May, weaker than the consensus call by analysts for an 0.4 per cent decline, according to figures released yesterday by Statistics Canada. The bellwether indicator is a measure of all goods and services produced in the economy.

However, analysts stressed that early results for June show a rebounding economy as auto production gears up and consumer confidence slowly revives.

"The recent easing in financial conditions, low interest rates and boost from fiscal stimulus are expected to result in an improving trend in quarterly growth in the second half of this year and into next," said Dawn Desjardins, assistant chief economist at RBC Economics.

"Conditions are looking much rosier for the third quarter" with consumer spending looking to gain traction, while Chrysler and General Motors emerge from bankruptcy, said Diana Petramala, TD Bank Financial Group economist.

In May, GDP took a hit after oil and gas extraction were hampered by falling export demand, Statistics Canada said. The manufacturing sector also continued to plummet, with much of the decrease in motor vehicle manufacturing and parts production.

"May was the month that Chrysler declared bankruptucy in the U.S. As such, transportation and equipment manufacturing largely contributed to weakness," said Petramala. "Services related to manufacturing such as wholesale and transportation and warehousing were also feeling the pinch."

Contributing to the drop was a lack of new construction activity. However, this was offset by the existing home market, which continued to show upward momentum.

"Home sales and prices have been on the up through the first half of 2009 which helped to contribute to the revitalization of demand," said Petramala.

With a solid decline in output in the second quarter, the Bank of Canada is expected to maintain a commitment to hold the key overnight rate at 0.25 per cent through the end of the second quarter of next year to ensure a recovery.

In contrast to the Canadian data, a contraction in U.S. economic activity eased significantly, according to figures also released yesterday. U.S. GDP fell at a much less-than-expected annual rate of 1 per cent in the second quarter. That's compared to the steep 6.4 per cent drop in the first quarter, the worst in 27 years.

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