Canada slow in recovering from recession
OTTAWA - Contrary to government boasts, Canada is not leading the world out of recession.
Little noted in Monday's hoopla about the end of recession is that Canada is now trailing the advanced economies in gross domestic product growth, the most reliable measure of an economy's health.
Canadian output shrank a still steep 3.4 per cent annualized in the April to June period despite a 0.1 per cent uptick in the final month, the worst performance among any of the G7 countries, and well below the United States' one per cent drop.
As well, many economists are now forecasting that Canada's closest economic partner will easily outpace Canadian growth for the rest of the year, before perhaps tailing off in 2010.
The strength of the anticipated U.S. rebound was in evidence again Tuesday with the release of new figures showing production is ramping up quickly south of the border, while in Canada, the goods manufacturing sector remains on its knees.
The Institute for Supply Management's manufacturing index shot past the expansion line of 50 in August to a surprisingly strong 52.9, while new orders jumped 10 points to 69.4, the highest level in five years. Even the woeful housing sector got a boost, with a future gauge of home sales rising to the highest point in two years.
"We think man, there's no contest, Canada has held up far better throughout and will continue to," said economist Douglas Porter of BMO Capital Markets.
"But the story is that our weakness in the exports sector is the great equalizer. The huge divide between Canada and the U.S. was on the net export side in the second quarter, and part of that is that the weakness in U.S. spending hit our exports, and the high Canadian dollar hit our exports."
The numbers bear out the analysis.
During the second quarter, Canada's domestic economy performed better than all expectations, with consumer spending showing a 1.8-per-cent spurt forward, led by a 19-per cent-spike in auto sales and a 6.2-per-cent pick-up in home investment.
But exports retreated for the seventh straight quarter -- collapsing 30 per cent in almost two years -- with the goods producing sector of the economy falling back 11.1 per cent between April and June alone, led by manufacturing's 16.4 per cent plunge.
Economists note that there are extenuating circumstances that brighten the picture for Canada's economy. The most important is that the current under-performance is as much a factor of timing as it is an indication of relative health.
Yes, the world is coming out of recession earlier, but it also went in earlier and fell further.
Subject to revisions, which often occur with GDP numbers, Canada's economy shrank a total of 3.3 per cent during the 11-month downturn that began last July.
By comparison, Japan's economy contracted 6.5 per cent, the European area by 4.7 per cent, and the U.S. by 3.9 per cent.
As well, the U.S. has so far lost seven million jobs, compared to Canada's net employment decline of 414,000. Even factoring in the disparity in populations, Canadian job losses total about half those in the U.S.
And the U.S. economy has benefited far more from government intervention than Canada's, in terms of the size of stimulus spending and how quickly it entered the economy.
Washington is expected to add US$10 trillion its national debt over the next decade due to efforts to shore up the economy -- including the wildly successful cash-for-clunkers program that is boosting current quarter growth. According to private sector economist Dale Orr, Ottawa is at most on the book for $200 billion in additional debt over the next 10 years -- about one-fifth as large in relative terms.
But Scotiabank economist Derek Holt says the delayed response by Canadian firms in not shedding jobs and inventory early enough at the first signs of the downturn is also a moderating factor in the pace of recovery.
Some recent estimates suggest the U.S. may record a 3.5 per cent bounce in the current quarter -- the July to September months -- whereas the Bank of Canada estimates growth in Canada during the period at 1.3 per cent.
"There's no free lunch," Hold explained. "If you don't shed inventory, if you don't shed payrolls as aggressively as other countries, you give it back on continued under-performance on productivity and continued performance on longer-run corporate earnings."
Economists still believe that overall, Canada's superior fiscal fundamentals, less leveraged banking sector, sounder financial position of consumers, and resource strength will win out in the longer term. But with all those advantages, Porter says it is still not a foregone conclusion Canada will outgrow its southern neighbour next year.