Canada: Catching a US cold?

Monday, June 2

The Canadian economy continues to be a story in contrasts.

There has been a significant improvement in the terms of trade, which is boosting nominal income growth, but manufacturing output is contracting due to the strong Canadian dollar and slumping US market.

As a result, real GDP growth slid into negative territory during the first quarter, after expanding at an annualised 0.8% pace during the fourth quarter and 2.3% during the third quarter of 2007.

The duality of the economy is apparent in the employment data, which shows a starkly different outlook by sector and province:

• In April, the share of the population with a job was 63.8%, just 0.1% below the record high set in the first quarter.
• Since 2005, Ontario has lost 14% of its manufacturing employment while Quebec has lost 15%.
• Yet despite the loss over 300,000 manufacturing jobs, total employment increased 2.1% during the past year, slightly topping the pace of the prior five years.

Canada's economy could prove surprisingly resilient in the face of the US slump, as long as global commodity prices remain robust.

Despite negative first quarter growth, surging wages in a low inflation environment are likely to bolster domestic consumption -- despite slumping non-energy US exports -- and allow economic expansion to resume.