Canada GDP: short term gain, long term pain?

The slowdown that the Canadian economy experienced in the final months of 2018 and the first part of 2019 seems to be over.  Statistics Canada reported this morning that real GDP grew by a better-than-expected 0.3 percent in April, following a 0.5 percent rise in March. This has prompted at least one Bay Street analyst to predict that the second quarter as a whole could see GDP rising at an annualized rate near 2.5 percent, after annualized growth well below 1 percent in both Q4/2018 and Q1/2019.

While the headline number was good, many of the details were less positive. Retail trade was slightly lower in April, which is surprising in light of the prodigious strength in employment already reported for the month.  Ominously, manufacturing output also fell in the month, mainly as a result of shutdowns in the automotive sector.  The 0.8 percent decline posted in April was the worst in almost two years.

The relative sluggishness in manufacturing output, against the background of continuing strong growth in the major market for Canadian manufactures (the United States) is just one cause for concern about the growth outlook beyond the immediate term.  In particular, the auto sector appears to be in retrenchment mode all around the world, with reports of plant closings and mass redundancies an almost daily occurrence.  The historic GM plant in Oshawa, Ontario has already fallen victim to this, and several other plants in Canada seem to be on borrowed time.  The controlled implosion of the aerospace divisions of Bombardier Inc will also lead to a significant loss of jobs in the coming months.

The ramifications of the Trump-inspired trade wars are starting to have a noticeable impact.  Canada has been sideswiped by the US government's paranoia about Huawei.  The company's CFO is currently under house arrest in Vancouver awaiting a hearing on a flimsy extradition charge brought by the US.  In response China is tightening the screws on trade with Canada, with the latest move being a ban on imports of Canadian pork and beef, announced this past week.  This will have a measurable impact on growth in Q3 and beyond unless a diplomatic solution can be found.

Adding to problems for the trade sector generally is the rise in the Canadian dollar.  At the start of the year most analysts' expectations were for the currency to trade sideways-to-lower.  However, it has been strengthening in recent weeks as markets reassess the relative policy courses of the Bank of Canada and the Fed. The latter may be poised to cut rates sometime in the next few months, but with headline inflation now well above target at 2.7 percent, will the Bank of Canada dare to follow suit?  Expectations that the Bank will have to hold off on matching the Fed have led to forecasts that the currency could move as high as 80 cents (US) later in the year.

Much can change.  Trade tensions with China could ease; inflation could start to move back towards the 3 percent target.  As things stand, however, it seems that if the economy has indeed posted 2.5 percent growth for Q2 -- which we won't know until late August -- that could well turn out to be the best result we shall see all year.