Canadian Historical GDP Revisions Indicate Stronger Growth in Recent Quarters

Today, Statistics Canada released historical revisions to Canadian GDP and the current account that covered the period from 1981 to the second quarter of 2012. StatsCan's bottom-line assessment for Canadian GDP was that there was "no substantial change to the level, nominal growth rate or real growth rate" in this period in aggregate. StatsCan added further that "the mean absolute revision to the annual real growth rate in GDP was 0.14 percentage points. The largest upward revision in real growth occurred in 2008 (0.4) while the largest downward revision occurred in 1999 (-0.4%)."

In terms of the most recent cycle, the revisions implied that the last recession saw a slightly larger cumulative decline of 4.2% from peak to trough compared to 3.9% previously; however, the recovery and expansion to date is now stronger in rising a cumulative 8.7% compared to 8.4% previously. This greater strength has resulted in quarterly growth in Canada being revised higher in four of the last five quarters until the second quarter of 2012. The most significant upward revision was to the third quarter of 2011 when the annualized growth rate was revised upwardly to 5.8% from 4.5% previously. Because of the higher level of output going into 2012, this will likely result in forecasts of annual 2012 GDP growth being revised higher by around 0.2 percentage points assuming that unchanged projections during the last two quarters of this year.

A key question for the Bank of Canada and monetary policy emerging from today's GDP revisions is what the changes imply the second quarter of 2012. As indicated, GDP growth has been slightly stronger during the economic recovery and expansion to date. On its own, this would imply a smaller output gap; however, the decline during the recession was also greater than reported. As a result, the level of real GDP is now estimated to be 4.1% above its pre-recession peak, which is actually slightly below the previously estimate of 4.2%. This would imply a marginally larger output gap; however, today's historical GDP revisions will also result in the central bank re-estimating potential growth in the economy that could have a more dominant effect although the direction of this revision is uncertain. The Bank of Canada will provide an update on its assessment of potential growth and the output gap in its next Monetary Policy Report (MPR) to be released later this month (October 24, 2012).

The revisions released this morning included a number of definitional changes to GDP that included:

• Non-profit institutions serving households' spending and investment activities are now reported separately. Spending in this category used to be lumped together with households in the old "consumer spending" series while investment by this sector used to be included in business fixed investment.
• Investment in intellectual property now reported as a separate component of fixed investment (e.g., mining, oil, and gas exploration, and R&D expenditures) was previously considered an intermediate consumption good.
• A new aggregate "final consumption expenditure" has been added. This represents the sum of expenditures of households, governments, and non-profit institutions serving households.
• An explicit breakdown of the general government spending and investment aggregate by federal, provincial, municipal, and aboriginal levels will now be available.
• Export and import price deflators will be calculated differently. This results in lower historical export price growth and higher import price growth resulting in net trade adding more to growth during the last decade.

As a result of these changes, the level of GDP, in nominal terms, is 2.6% higher than previously reported in the second quarter of 2012. The most significant contributor to this upward revision was the inclusion of R&D expenditures and military weapons systems in business and government investment.

With respect to the revisions to the current account, StatsCan concluded that "there was no material changes to Canada's current account balance" in the period of 1981 to the second quarter of 2012. Here again, however, the near-term picture saw some significant changes. The annualized current account deficit was increased by an average of $13.0 billion with the second-quarter 2012 annualized deficit revised to $73.5 billion from $64.1 billion previously. As a share of GDP, the ratio increased to 4.1% from 3.6% previously with the higher level of nominal GDP providing some offset.

In conclusion, the revisions imply a slightly faster pace of growth in recent quarters. This greater momentum could prompt some upward revisions to 2012 GDP forecasts. On its own, this would imply the Bank of Canada estimating a slightly faster closing of the output gap although it was also the case that economic activity dropped more sharply during the last recession, which in fact provided more than a full offset. As well, these historical revisions could alter the central bank's estimate of potential growth that may have a more dominant effect. The outcome of this re-estimation will likely be contained in the upcoming October MPR. The revisions of the current account imply a much larger deficit for the second quarter of 2012 in nominal terms and as a share of GDP. Such revisions will abet concerns by the Bank of Canada about a too strong Canadian dollar; however, this will be tempered by the fact that the net exports have provided slightly less of a drag on real GDP growth since the recession than was previously estimated.