Marked Easing in Decline of Canada's GDP

Canada's February GDP report continues to indicate a weak economy with the release showing a seventh consecutive month of decline. However, some optimism can be gleaned from the fact that the most recent decline of 0.1% represents a marked easing from drops of 0.7% in January and 1.0% in December. The decline in February was in line with market expectations where earlier-released reports had flagged a likely slowing in the pace of decline.

The moderation in declining activity largely reflected a 19% bounce in motor vehicle production after weakness in earlier months reflecting extended Christmas shutdowns to work off an unwanted build in inventories. This rebound did allow manufacturing activity to rise for the first time in seven months though barely so rising just 0.1%. This reflected ongoing weakness elsewhere in the sector. Eliminating the impact of the motor vehicle production, manufacturing activity would have dropped 0.8%. Preliminary motor vehicle production numbers for March suggest that another gain though at about one-half the rate of February's gain.

Most other goods-producing components outside of manufacturing declined in the month led by construction (-2.1%) and utilities (-1.2%). Output in service-producing industries rose on net by a modest 0.1%.

The moderation in the pace of decline is encouraging and largely reflects a rebound in motor vehicle production. However, the plummet in activity in December and January, sets up the first quarter to be very weak with our current monitoring pointing to an annualized drop of 6 ½%. Though this is less than the 7.3% projected by the Bank of Canada in their recently released Monetary Policy Report, it is unlikely to prompt them to move away from keeping monetary conditions very accommodative. Our projected drop in growth still represents a worsening in the pace of decline from the 3.4% decline recorded in Q4. The central bank is likely to remain wary about this deteriorating trend intensifying through the remainder of 2009. However, the less pronounced decline in Q1 does provide further reason for the Bank of Canada to leave any credit or quantitative easing initiatives in reserve.

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.