Fourth-quarter GDP growth was bad: here's why -

Fourth-quarter GDP growth was bad: here’s why

The Canadian economy needs a lift, but the world isn’t co-operating


Update: As expected, GDP growth in the last quarter of 2012 was a dismal 0.6 per cent annualized, and the economy shrank 0.2 per cent in December. Despite that, Finance Minister Jim Flaherty said today the government might further trim spending in the next budget, as lower-than-expected growth impacts revenue flows the bean counters were banking on. NDP House leader Nathan Cullen called the finance minister’s concern over balance budgets at a time of withering growth “a manufactured crisis.”

Here we explain why the economy stalled in late 2012 and why it might take some time for it to pick up speed again.

Canada’s fourth-quarter GDP figures, out on Friday, are expected to show the clearest picture yet of the shift the economy has been undergoing for the per past year or so. For the first time in nearly seven years, monthly GDP numbers have already revealed, Canada underperformed the U.S. in 2012.

In January, the Bank of Canada forecast Octoober-to-December growth would come in at one per cent, but Governor Mark Carney hinted this week he expects the actual number to be lower.

Why the slowdown? Largely, because consumer spending and the housing market, which propelled Canada out of the recession as the rest of the global economy dwindled, are losing steam. And now that the economy can’t run on internal combustion alone anymore, it’s not clear how much of lift it’s going to get from the outside.

Here’s what happened over the past decade:

Source: Statistics Canada - Canada Yearbook 2012, Chapter 9: Economic Accounts.

Exports, Canada’s traditional engine of growth, have been shrinking as a share of the economy: down to around 30 per cent of non-inflation adjusted GDP from a record 46 per cent in 2000. As the chart shows, the 2008-2009 crisis delivered a considerable blow to Canadian exports, which fell faster than GDP and haven’t come close to recovering. But the decline started long before global demand seized up in the wake of Lehman Brothers etc. The long-term trend reflects a loss of competitiveness and failure to diversify away from the U.S. and toward Asian economies, as the Bank of Canada has long been saying.

Consumer spending, by contrast, expanded as a share of the economy during the recession, limiting the magnitude of the contraction and picking up the slack from declining net trade:

Source: Statistics Canada - Canada Yearbook 2012, Chapter 9: Economic Accounts.

Let’s take a look at residential real estate now. As Econowatch pointed out before, the housing sector has grown considerably as a share of GDP over the past decade:

The trouble now is that the housing market has been cooling since the middle of last year and indebted consumers seem to have finally (hopefully?) maxed-out.

What Ottawa and the BoC are banking on now is what might be called the “Great Canadian Back Swap:” exit real estate and households, and enter exports once again.

Too bad the rest of the world isn’t cooperating.

Take Washington’s sequester, for one. The $85 billion across-the-board spending cuts set to come into effect on Friday (barring another Hail Mary postponement) risk slowing down cross-border trade just as the U.S. recovery shows signs of picking up. U.S. authorities stand ready to ax some 2,750 border inspector jobs, which might clog airports and other key transit points, the Canadian Manufacturers and Exporters organization warned. On the chopping board is also spending needed to implement the Canada-U.S. Beyond the Border Action Plan, which was supposed ease post-9/11 security and bureaucratic bottlenecks that Ottawa said cost the economy an estimated $16 billion a year.

And there’s more bad news from Europe, where Italy’s inconclusive elections might open yet a new chapter in the euro zone crisis. Though the Old Continent isn’t one of Canada’s chief trade partners, a deeper recession there would still hit Canuck exports, albeit indirectly.

So, what if exports fail do to the heavy lifting? In a speech on Monday, Canada’s central banker spoke hopefully of timid increases in corporate borrowing, which, if sustained, might mean more spending on things like machinery and equipment.

Alas, though, as the Wall Street Journal notes, today’s Statistics Canada survey on business investment intentions might have muted even the governor’s resilient optimism. Public and private firms polled by the statistical agency said they expected investment to inch up a meagre 1.7 per cent in 2013, the smallest gain since 2009.

Of course, what investors say they’ll do and what they actually do aren’t always the same thing. And business moods would likely turn quickly, if the dark clouds abroad somehow dissipate — say Washington avoids the sequester and shelves the meat cleaver approach to budget cuts and the euro zone manages once again to hold itself together.

That, though, is a very big “if.”


Fourth-quarter GDP growth was bad: here’s why

  1. Erica, if you could lose the grey background in your charts, and other cheezy Excel defaults, the world would be a better place.

    • I know, apologies — I usually have much better looking things, technical difficulties today

      • Must be Windows 8 install day over there. :-)

  2. Certainly the higher dollar is one reason for the drop in exports, and the dollar is no longer rising against its American counterpart, so you can expect exports to perform better in terms of growth in the future.

    As for the sequester, it is so minuscule in relation to the entire budget it will have absolutely no effect on Canada. We’re talking about a small fraction of a single percentage of government spending. It’s not even a spending cut, it’s a cut in the level of spending growth in a low-inflation environment.

    • The dollar is no longer rising because the BoC is running its own version of QE. Every country is now running a printing press in a race for global currency devaluation. No the sequester won’t do much to Canada, but when the US finally collapses we will feel the pain. Debt must grow exponentially, and the curve is approaching infinity. Printing money just hastens the destruction of wealth, and interest rates must eventually rise. When they do, it will be apparent to all that the US debt is unpayable. On the bright side, we will get a reboot of the system, and the financial cronyism will be eliminated.

      • If the bright side is what happened to Argentina circa 2001/2002.. but globally?

        That’s.. not very bright at all.

      • That’s false. The BoC is not running any version of QE.

        Yes, some countries in the world are doing QE, namely the US, Japan, and the Euro Central Bank, but not Canada and not many other countries.

    • Actually, Canada’s abysmal productivity and lack of business investment is the real culprit — not the dollar. A high Canadian dollar is good for the country (in the long term). It maintains our wealth, keeps inflation down, and encourages efficiencies. The United States did exceedingly well in the 1990s because of its strong dollar policy! Switzerland is another great example of a country able to compete and innovate despite its ultra strong currency — the franc (it hit C$1.10 today). If Canadian businesses would quit whining and actually INVEST in productivity enhancing machinery and equipment, Canadian exports would improve. I’ve never believed in devaluing our way to prosperity and feel those who advance such notions are common, uninspiring, and undercutting. It’s inherently second-rate of some in this country to openly argue for a weak dollar. Pathetic. Improve productivity, improve export performance.

      (We could also help productivity growth — not to mention benefit financially — by dismantling our antiquated supply-side management system for dairy and by opening up the telecom sector to free-market foreign competition).

      • I agree that a high dollar is good for the country. However, a rising dollar will reduce exports, simply because the rest of the world will get less for the same amount of their own money.

  3. Until banking cartels stop getting away with their appalling financial crimes and getting bailed out to the tune of trillions instead of letting the market take them down as is natural, taxpayers will be on the hook, costs/taxes will go up for everyone, credit will remain difficult to obtain, and everyone will suffer. The problem with the modern global economy is that it is incredibly energy inefficient due to all the global sourcing/shipping that is done due to currency/subsidy distortions; “free” trade which gives corporations more power to achieve monopoly and escape costs like fair pay for employees, environmental protection, healthcare, safety regulations as well as escape accountability to the public; and of course, a debt-based financial system in which banks print money out of thin air and lend it to people, corporations and governments that must pay it back with real value. Until the citizens own their national banks outright and counterfeit-based… I mean “fractional reserve debt” based banking is either abolished or re-engineered to profit the citizens on whom national currency values are based instead of tiny cabals of men who expect trillions of dollars of reward for defrauding the world, then society will be marred by poverty, wealth-gaps and confict, and the economy will only get worse and worse until we achieve something resembling feudalism. Our corporate/financial masters want low-paid workers and docile consumers. Not empowered democratic citizens and an equitable society.

    • Well said, spoken like a human being with compassion for human life.

  4. Carney was keeping interest rates low and stoking the housing market with cheap credit in the belief that when housing prices peaked, there would be a modest correction that would unfold smoothly without major external shocks. Unfortunately, things don,t seem to be working out as planned. The US sequester will be one big negative shock and we could get another one from Europe. Bizarrely, the Keystone XL pipeline was never mentioned by name in the last Monetary Policy Report, but it seems that the BoC’s forecasts were based on it going ahead and this doesn’t seem to be panning out, or should I say it seems they may have hit a dry hole. Even if it is approved, it may be at the expense of growth- and job-destroying concessions to Washington by the Canadian government. The probability of a housing bust in Vancouver-Victoria, the GTA and other Canadian urban centres in 2013 seems to be substantially greater now than it was in October. No wonder Carney is getting out while the getting is good.