news Canadian economy stalls in July, putting in doubt hopes of stronger rebound

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Canadian economy stalls in July, putting in doubt hopes of stronger rebound



Wed Sep 30, 5:56 PM

By Julian Beltrame, The Canadian Press


OTTAWA - The Canadian economic recovery ran into a wall in July, stunning expectations and creating new doubts about just how long it will take for production and jobs to rebound to pre-recession levels.

Following a 0.1 per cent increase in economic growth in June that signalled the end of the recession, economists had been expecting a strong rebound in July of anywhere from 0.5 to 0.7 per cent.

And many of the early indicators were pointing in that direction, particularly the outsized 5.5 per cent pop in manufacturing sales the agency has previously reported.

Instead, the economy laid a goose egg - zero growth.

"This is a shocker. We're not talking about a shot across the bow of the optimists, this is more like a torpedo through the hull," said economist Douglas Porter of BMO Capital Markets.

With almost daily threats to his government, Prime Minister Stephen Harper tried to make the best of the situation, insisting that Canada is outperforming the United States.

However, that was a tougher argument Wednesday as the the U.S. revised upwards its second-quarter performance to a 0.7 per cent contraction, compared with Canada's minus 3.4 per cent.

"As I have said repeatedly, while we are seeing the beginnings of a global recovery, it is fragile," Harper told the House.

Analysts were divided on the meaning of the July surprise.

At the very least, it will send economists and policy-makers scurrying back to the drawing board, trying to figure out not only what went wrong with their projections, and how much to write down on third-quarter growth.

Longer term, opinions varied.

One scenario now clearly more in play is that Canada will undergo a prolonged flat period, or one of stops and starts - often referred to as an L-shaped recovery - that would be marred by little job creation.

"The figures provide a sobering reminder that the technical end of a recession may not imply a rapid recovery," economist Erin Weir of the United Steelworkers union said.

"Whatever path output takes, the labour market will be even slower to recover," because businesses will resort to ramping up work hours of existing employees and taking advantage of productivity gains before resorting to rehiring.

Carl Weinberg of High Frequency Economics in New York, who had bucked the trend in predicting no or negative growth in July, said many economists have underestimated the extent Canada is dependent on the U.S. and how weak the U.S. economy has become.

"The key parts of the Canadian economy are manufacturing for exports to the United States, and the energy sector, and demand from the U.S. is being reduced permanently by a combination of the recession and a move toward conservation. And finally lumber for the construction industry and that's dead and will stay dead for a long time," he explained.

Not all analysts were as gloomy, or prepared to issue a mea culpa.

Merrill Lynch chief economist Sheryl King said she believes August and September will show better results and remained optimistic about 2010.

In part, she said, the July number was hammered by temporary factors such the municipal strike in Toronto and work stoppages in the mining sector.

It was also the coldest July in 14 years, something that kept air conditioners turned off, affecting utilities.

"I'm not going to change my long-term forecast based on the weather," she said.

But CIBC chief economist Avery Shenfeld said it will cause economists to downgrade their forecasts for the second half of 2009 and possibly 2010. He said it may also cause the Bank of Canada to keep its policy interest rate at its current record low rate throughout next year.

Two weeks ago, the central bank prompted speculation it might move off its easing track earlier than its July 2010 conditional commitment by announcing the economy was bouncing back faster than earlier believed.

On Monday, Bank of Canada governor Mark Carney was so sure of his forecast that he boasted about having been a lonely voice in the spring in predicting that policy measures would spur growth later this year, particularly so in Canada, "expectations (that) are beginning to be fulfilled."

But if Statistics Canada is right about July, even the central bank's original 1.3 per-cent target for the quarter just ended - July, August and September - is now in jeopardy.

In a report full of surprises, the biggest shocker may have been that the big increase in manufacturing sales in July was not matched by production. With time to make up after nine monthly declines, the manufacturing sector advanced only 0.8 per cent in July.

There were also surprising declines in the mining sector, utilities, construction, retail trade and municipal public administration.

On the positive side, services were up, but a disappointing 0.1 per cent overall, led by wholesale trade and a 0.2 per cent rise in finance, insurance and real estate.

Confusing the picture even further, Statistics Canada said total non-farm payroll employment rose by 74,300 in July, when its earlier labour data had indicated an overall 45,000 jobs decline in the month. The two surveys don't always agree, but it is unusual to have such a wide disparity, said economists.