After hot start, big chill hits Canadian and U.S. economic recoveries

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After hot start, big chill hits Canadian and U.S. economic recoveries

Fri Jul 30, 3:36 PM

By n Beltrame, The Canadian Press

OTTAWA - The economy's great slowdown from the initial fast recovery continued

in May with a second consecutive month of underwhelming output that raised more

questions about the Bank of Canada's decision to raise interest rates.

The Canadian economy crawled forward a disappointing 0.1 per cent during the

month, following a flat reading in April, and once again below the consensus

forecast by one-tenth of a point.

While not disastrous, the pace will make it difficult for the economy to match

the Bank of Canada's recent projection of three per cent growth in the second

quarter, which ended June 30.

And it makes a distant memory of the spectacular growth spurt that began last

fall and continued into this year, when the economy grew 4.9 per cent in the

last quarter of 2009 and a decade best 6.1 per cent in the first quarter of

2010.

Canada's economy appears to be tracking that of its sluggish neighbour to the

south, which also reported disappointing numbers Friday. The U.S. grew at a 2.4

per cent pace in the second quarter, down from in the 3.7 per cent rate in the

first quarter. It was the economy's weakest showing in nearly a year.

Analysts said Canada's economy will likely mirror the U.S. when the second

quarter numbers are in at the end of next month — at between 2.2 and 2.6 per

cent — and that the third quarter may be even weaker.

" I don't think we can get to three per cent ... you'd need a very, very

significant number in June, " BMO Capital Markets economist Reitzes said

of the Bank of Canada's estimate last week.

Only in April, the Bank of Canada had projected the second quarter pull-back at

3.8 per cent and that no quarter would fall below 3.5 per cent for the rest of

the year.

Still, while the Canada-U.S. gross domestic numbers look comparable, economists

note the two economies are in reality like night and day. The big difference is

that after picking up 227,000 new jobs in the past three months, Canada has

recouped all the job losses suffered during the recession, whereas the U.S. is

still down about eight million.

Reitzes and many economists say a slowdown at this point in the recovery is to

be expected.

" That's the way recoveries usually work. You get a lot of pent-up demand spent

and inventories built up, and as the factors fade you do get a soft patch, and

then things tend to accelerate afterwards, " Reitzes explained.

But the bears, many of whom have been advising Bank of Canada governor Mark

Carney to hold off on rate hikes until the recovery is more entrenched, are

having none of it.

" What is normal in the context of a post-World War II recovery is that four

quarters into it, real GDP expands at over a six per cent annual rate, " responds

Rosenberg, chief economist at the Gluskin Sheff wealth management firm.

The weakness in the U.S. stems from their debt-burdened consumers, who fearing a

further depreciation on the value of their homes and other risks, have taken

their money to the bank, rather than the mall.

Canada's weakness, says TD Bank chief economist Craig , stems from the

fact that the rest of the world is still recovering from a financial systems

crash.

There was nothing wrong with the Canadian economy when the world went off the

cliff in the fall of 2008, he noted.

" And it's entirely unfair, but if the rest of the industrialized world is going

to go through a mid-recovery slide, Canada is going to go along for the ride. "

Analysts said they doubt the recent numbers will dissuade the Bank of Canada

from raising rates again in September, following two quarter-point increases in

June and July, but added the central bank may then take a break after that.

said at 0.75 per cent, the central bank's key rate is still very

stimulative.

But IHS Global Insight's Bethune reiterated this was no time to add drag

to growth by making borrowing and spending more difficult.

The Bank of Canada is the only central bank in the G7 that has been raising

rates, which were cut to combat the credit crisis.

The May numbers do show several sectors of the economy recovering, particularly

goods producing industries, which grew 0.6 per cent in May. The fuel, however,

was almost entirely the oil and gas sector.

Meanwhile, the services sector contracted by 0.1 per cent and residential

construction fell 3.8 per cent in response to the cooling housing market. Real

estate agents and brokers reported an 11.3 per cent slump in activity..

In a separate release, The Canadian Real Estate Association said Friday that its

forecasting that final home sales for this year will be 1.2 per cent lower than

last year, in part because of higher mortgage rates.

In 2011, national sales will fall further by 7.3 per cent to 426,100 unites,

CREA estimated.