Some Good News For Prime Minister Harper Ahead of Canadian Election

Canadian voters go to the polls on October 14th in early elections called by 49-year-old Conservative Party leader Stephen Harper, who has led a minority government since January 2006. A similar result seems likely. He is opposed by Stephane Dion, the Liberal Party chief. Canada has a parliamentary system of government. The state of the economy is the primary issue.

Real GDP grew less than expected in 4Q07 (+0.8% saar), 1Q08 (-0.8%), and 2Q08 (+0.3%). But monthly GDP, which is calculated from the supply rather than demand side, jumped 0.7% in July after dipping 0.1% in May and rising just 0.1% in June. The 0.7% advance was the best month since March 2004 and exceeded expectations by three times. While today’s figure is dated by the ominous escalation of global market turmoil from which Canada has not been immune, the release comes at a fortuitous time for Harper, who called early elections to avoid defending his title against a possibly less auspicious economic backdrop further down the road. The Toronto Stock Exchange index fell 6.9% yesterday. Growth in July was spurred by monthly increases of 3.1% in the energy sector, 1.9% in wholesale turnover, and 1.3% in manufacturing. However, overall GDP growth from July 2007 amounted to a weak 1.2%, and retail sales, which correlates better with voter sentiment than GDP, was unchanged from June.

Canada also released August producer price figures today. The PPI dipped 0.2% m/m because of a 6.0% plunge in oil. Non-oil producer prices went up 0.8% m/m and 3.8% from August 2007, the largest 12-month increase in 16 months. Weakness in the Canadian dollar boosted producer prices by 1.1 percentage points in August; had the exchange rate been flat, the PPI would have dropped by 1.3%, not 0.2%. Canada is unusual in having posted a budget surplus for the past eleven fiscal years, but harder economic times can be observed in its declining trend from C$ 14.2 billion in Fiscal 2006/7 to C$ 9.6 billion in Fiscal 2007/8 and a target of just C$ 2.3 billion for the present fiscal year. The debt/GDP ratio last fiscal year of 28.9% was much lower than before the string of budget surpluses began.

Larry Greenberg
CurrencyThoughts