Canadian GDP Falls again in January

The GDP report for January confirmed that the significant weakening in Canada's economy in late 2008 continued into 2009 with the economy contracting by an as-expected 0.7%. The weakness built on December's huge 1% decline and sets up for another hefty quarterly drop in economic output.

January GDP was 6.2% lower than the average level in the fourth quarter of 2008 (at an annualized rate), raising downside risks to our forecast that the economy contracted at a 4.4% (annualized) pace in the first quarter of this year.

The 0.7% drop in GDP reflected weakness in many sectors, which was tempered by an exceptional increase in retail spending activity. Once again, the weakness was skewed to goods-producing industries where output fell 1.9%, led by a 3.1% drop in manufacturing and 3% decline in construction activity. StatsCan reported that production of motor vehicles and parts sank 27% in January, accounting for about one-half of the decline in manufacturing output.

Service-producing industries showed a more temperate decline of 0.2%, led by significant weakness in wholesale trade (-3.4%) and transportation and warehousing (-0.7%). The declines were partially offset by the 1.4% rebound in retail sales and a rise in public sector output.

The weakness in late 2008 and the soft start to 2009 raises the odds that first-quarter GDP will again underperform the Bank of Canada's forecast. When the forecast was issued in January, the Bank projected that the economy would contract at a 4.8% annualized pace in the quarter, a pick-up from the 3.4% annualized drop in the fourth quarter of last year. The fourth-quarter decrease also underperformed the Bank's forecast for a 2.3% decline.

The intensification of quarterly declines in economic output will keep the Bank of Canada working on providing monetary policy stimulus to the economy. With the precedent being set by other central banks around the globe of using their balance sheets to supplement more traditional methods of monetary policy easing and Canada's overnight rate already at an exceptionally-low 0.5%, the Bank is set to outline its options for credit and quantitative easing in the upcoming April Monetary Policy Report.

RBC Financial Group
http://www.rbc.com

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.