Canadian GDP Rebounds Back into the Plus Column

Real GDP rose a stronger-than-expected 0.4% in April following two months of decline, with output down 0.2% in March and 0.3% in February. Market expectations had been for a return to positive growth, but by a more moderate 0.3%.

The strength was relatively broadly based with output in both goods-producing and service-producing industries up 0.4% in the month. However, within these two main components, there was greater dispersion of activity. For example, the strength within goods-producing industries was led by manufacturing with activity jumping 1.9%. This reflected a solid gain in auto production where, StatsCan noted, producers were finding ways to circumvent a strike by a major U.S. auto parts supplier. This strike was eventually settled late in May.

This strength in manufacturing was partially offset by declines in mining and oil and gas extraction (down 1.5%) and construction (down 0.7%). The weakness in the former was attributed to “operational difficulties and maintenance.” The weakness in construction was relatively broadly based, although it was pointed out that recent increases in non-residential building permits augur well for growth in this component going forward that will provide some offset to likely further weakening in residential construction activity.

Strength in service-producing industries was led by gains in wholesale trade (up 2.1%) and retail trade (up 0.6%) that had been flagged by earlier-released monthly data for these sectors. Less anticipated was a 1.2% surge in the accommodation and food services component, which reflected increased tourism, particularly from overseas visitors. Most other service components showed more moderate gains of 0.1% to 0.2% in the month.

The solid rise in April GDP leaves the level of output in the month already up an annualized 0.7% relative to the first quarter. This reinforces the view that the fall in activity at the start of the year, with first-quarter GDP dropping an annualized 0.3%, reflected the confluence of a number of negative factors - strike activity, retooling in the auto sector and inclement weather - that were not expected to persist.

However, the pace of growth in the second quarter, although positive, is not likely to be particularly robust because of some less transitory restraining factors, such as a weak U.S. economy. The risk that the restraint from these more long-lived factors could intensify will likely result in the Bank of Canada holding the overnight rate at a still stimulative 3.00% through the end of 2008 despite growing concern about inflation pressures.

Shortened U.S. data week ahead

This week, shortened by the Independence Day holiday on Friday, will bring some data risk, including the manufacturing and non-manufacturing ISMs, construction spending and payrolls (to be announced Thursday because of the Friday holiday). For today, the Chicago PMI is expected to slip from 49.1 to 48, a soft, but not recessionary reading.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.