Canadian Economic Funk

• Canadian economic activity contracted by 0.1% in February

In the depths of the current recession, Canadian real GDP contracted a further 0.1% in February, the seventh consecutive monthly decline. While this isn’t good news, this drop was much calmer than the 0.7 and 1.0% dives witnessed over the last three months. Economic activity has now fallen 3.0% from the peak in July of 2008, as production remains at the lowest levels in over 2 years. There were some bright spots in the report with only 13 of the 21 industries posting declines.

While the Canadian economy is still struggling with a weakening export sector, there are some signs that external economic pressures are easing, as manufacturing edged up 0.1% in February. However, this was largely driven by an increase in demand for autos from the U.S., as motor vehicle production shot up 19%. While this may sound impressive, automotive production still remains 50% below year ago levels. Excluding autos, manufacturing fell 0.8%, largely reflecting continued weakness on the global stage. Meanwhile the domestic side of goods production remained under pressure. Construction was a major source of weakness for this sector, as building fell to a three year low in February, led by a noticeable 5.7% decline in residential building. Non- residential building also slowed by 0.6%, as businesses scaled back on investment in the wake of depressed corporate profits.

There were also signs that consumers loosened their purse strings in February, as services edged up 0.1%. Certain services tend to be more recession proof than others, however the gains were concentrated in sectors that tend to be more discretionary. The main drivers were a 0.7% increase in arts, entertainment and recreation, and a 0.6% increase in food and accommodation. Real estate services were also a bright spot with a 0.6% advance due to an increase in existing home sales in February, which likely continued into March.

Admittedly, the contraction in the Canadian economy in the first two months of 2009 has been faster than we anticipated, and the decline in economic activity likely dropped by the fastest pace on record in the first quarter. While this report showed some signs that things have begun to turn around in the Canadian economy, it is unlikely that this is sustainable. Firstly, the automotive sector remains underwater, and expected work stoppages will dampen production in this industry over the rest of 2009. Secondly, Canadian firms have been slow to adjust their inventories in the face of weakening demand, and the 0.6% decline in the production of goods was unlikely enough to scale down the unwanted inventories. Thirdly, the amount of job losses remained elevated in March, which is not good news for the Canadian domestic economy. Overall, we expect the Canadian economy to continue to contract through the first half of 2009.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.