TORONTO — The Canadian economy recovered from the disappointing 0.5 percent annualized decline in the second quarter of 2011, which was revised slightly from a previously estimated -0.4 percent, with growth bouncing up to 3.5 percent.
Expectations going into the report were for some improvement although to a more moderate 3.0 percent gain, said Paul Ferley, assistant chief economist with RBC Economics Research.
“Expectations for a rebound in third-quarter GDP growth were largely based on the earlier released merchandise trade numbers that indicated an almost full reversal of the weakness in second-quarter 2011 trade,” he explained. “This weakness in trade was the main contributor to the overall decline in second-quarter 2011 GDP.”
Today’s report confirmed this offset with net exports contributing 5.2 percentage points to growth following the sizeable 6.1 percentage point reduction in the second quarter. The improvement largely reflected exports rising an annualized 14.4 percent in the quarter after dropping 6.2 percent the previous quarter.
Imports also made a contribution to the improvement in net exports falling 3.2 percent after the 13.6 percent surge in the second quarter.
Final domestic demand rose only 0.9 percent in the third quarter, which was down from the 3.1 percent gain in the second quarter. This mainly reflected business investment dropping 3.6 percent after a 14.6 percent surge in the second quarter.
“We expect business spending to return to positive growth in the fourth quarter of the year with strengthening capital expenditure particularly in the natural resource sector,” said Ferley.
The slowdown in final domestic demand was also the result of some unexpected slowing in consumer spending growth to 1.2 percent from a 2.1 percent gain in the second quarter. Most of the downward surprise was in the durables component, which dropped 1.5 percent, said Ferley.
“Given the continued strength in residential investment, which jumped 10.9 percent in the third quarter, we expect some recovery in this area of consumer spending in the fourth quarter,” he added.
The main drag on overall third-quarter GDP growth came from business inventories, which subtracted 2.7 percentage points in the third quarter of the year.
The strong gain in third-quarter GDP provides support to the view that the disappointing second-quarter decline of 0.5 percent reflected the confluence of a number of transitory negative factors, Ferley explained. These factors include the supply-chain problems in the motor vehicle sector that emanated from the natural disasters in Japan in March, as well as the wildfires in northern Alberta that contributed to numerous shutdowns of oil sand production facilities.
“These factors contributed to the weakness in second-quarter exports; however, the boost to third-quarter growth provided by the reversal of these factors is not expected to continue to the same extent into the fourth quarter,” he added. “Although the 0.2 percent rise in September GDP and the recovery in business investment bode well for growth to continue in the final quarter of 2011, we are currently projecting a moderation in the annualized rate to 2.0 percent. This would result in 2011 annual growth of 2.4 percent.”
Despite an expected moderation in fourth-quarter growth, the average quarterly rate during the second half of this year is about a percentage point higher than what the Bank of Canada forecasted in its latest forecast released in October, said Ferley.
“Stronger-than-expected growth on its own would argue for less monetary policy accommodation; however, the central bank has made it clear that it sees the main downside risks as external to the Canadian economy,” said Ferley. “A festering of the European debt situation could weaken the global recovery further with attendant downward pressures on commodity prices. Until there are indications that euro zone policymakers are able and prepared to contain these pressures, the Bank of Canada is likely to keep policy highly accommodative.
U.S. GDP rises 0.2 percent
Also released this morning was the September GDP report for the United States. GDP rose 0.2 percent in the month, and this was slightly below an expected 0.3 percent although the August gain was revised up to 0.4 percent from the 0.3 percent initially estimated, said Ferley.
Strength in the economy continues to be skewed to goods-producing industries, which were up 0.5 percent in the month in comparison to only a 0.1 percent gain in service-producing industries. The increase in the former reflected a 0.6 percent rise in manufacturing, and a 0.5 percent gain in the mining and oil and gas extraction component.
SOURCE: RBC Economics Research press release