Pace of Decline in Canada's GDP Eases Up

GDP output fell an expected 0.1% in April, which represented an easing from the 0.3% drop in March and matches the 0.1% contraction in February. These recent declines indicate a marked improvement from the average monthly decline of 0.8% that prevailed November through January.

The weakness largely reflected a 0.5% decline in goods-producing industries, led by a 1% fall in manufacturing output. The mining and oil and gas extraction component fell 0.7%. The weakness in manufacturing was relatively broadly based, although the motor vehicle and computer and electronic components managed to increase, thus tempering the overall decline. Within the mining component, Statistics Canada highlighted weakness in activity related to natural gas and potash extraction.

Output in service-producing industries was unchanged in the month reflecting offsetting movements in the various sub-components. Significant gains were recorded in wholesale trade (0.5%) and finance, insurance and real estate (0.4%). Within the latter component, activity by real estate agents and brokers jumped 8.2% in the month, suggesting much stronger-than-usual spring housing market. These increases were offset by declines in other sub-components, led by a 0.6% drop in retail trade.

An easing in the pace of decline in April GDP relative to March is encouraging, although the improving trend is not likely to be sustained next month. Preliminary motor vehicle production numbers are flagging deepening declines in May GDP activity as a result of widespread production shutdowns in Canada following the declaration of bankruptcy by Chrysler's U.S. operation. However, the improvement in the April numbers appears to be sufficient that the pace of decline in second-quarter GDP will likely be more than halved relative to the 5.4% drop recorded in the first quarter.

Looking further ahead, given the low level of inventories, the prospect of auto production coming back, easing credit conditions and a projected boost from fiscal stimulus in both the United States and Canada, we expect this improving trend in quarterly growth to continue through the end of this year and into 2010.

That said, the prospect of declining activity near-term is expected to keep monetary conditions accommodative to prevent this recovery from faltering. Thus, the Bank of Canada is likely to remain steadfast in its earlier-announced commitment to keep the overnight rate unchanged at 0.25% through the end of the second quarter of next year (albeit conditional on inflation remaining well-behaved).

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.