Canadian National Accounts Data: Flash Report and Implications for Monetary Policy

With all of the headlines on the problems in the United States—how the U.S. economy is heading for recession and how most of Canada's economic problems are due to the weak U.S. economy—who would have thought that over the past three quarters, the U.S. economy has actually outpaced Canada, with growth of 6.5% cumulatively, compared with Canada's 3.4%? The United States will most likely have only one negative quarter (the second quarter of 2008) while Canada has already had one (first-quarter 2008), and today's results put the already weak forecast for second-quarter 2008 in jeopardy. Global Insight and others have been forecasting the second quarter of 2008 to be even weaker than the first quarter—not a pretty thought!

We can be certain that the possibility of recession in Canada will dominate the headlines for the next few months at least. This is important from a profile perspective, since the highest profile definition of a recession in Canada is two consecutive quarters of negative growth. Make no mistake about it, however: regardless of today's bad news for Canada and yesterday's upward revision of first-quarter 2008 growth for the United States to 0.9%, current economic conditions are tougher in the United States than they are in Canada.

From an optimistic perspective, some of the weakness in the first quarter was due to tough weather, which affected construction and transport. In addition, inventory adjustment contributed somewhat to the first-quarter weakness. Nominal GDP (the general tax base) is still moving along at a strong clip thanks to high export prices; some of the impact of high export prices shows up as profits to commodities exporters and to governments. These price impacts are deflated out in the real GDP data we are looking at above, however. Therefore, corporate profits and government revenues (for the federal government and the commodities-exporting provinces) are holding up better than one would think based on this real GDP data.

Today's weak results will be particularly surprising to the Bank of Canada. In its April Monetary Policy Report, it forecasted first-quarter growth of 1.0% annualized, a more optimistic forecast than that of most economists. While some recent threatening news on the inflation front has caused some to speculate that the Bank may not cut rates at its next meeting on June 10, today's surprisingly weak economic growth results reinforce the need for further monetary easing from the Bank.

The early indications are that these first-quarter results will lead to a slight downward revision to Global Insight's current forecast for growth for 2008, which is currently 1.4%. The full and final impact of this new National Accounts data on Global Insight’s June 2008 short-term forecast awaits a thorough analysis and running of our econometric model. Global Insight expects to provide our preliminary report for the June Canadian Short-Term Forecast and Analysis within a few days.

We will be presenting a teleconference call for clients and potential clients on June 11, at 11:00 a.m. EDT, to provide our just-updated Canada and U.S. June forecasts. As usual, we will provide a good opportunity for questions and discussion. For details and to register, please see the Global Insight Web site.