Canada Emerging From Biggest Slowdown Since Recession

Canada is beginning to emerge from its sharpest economic slowdown since the 2008-2009 recession.

The world’s 11th-largest economy probably expanded at the fastest pace in two years last quarter, kicking off what the central bank projects will be a stretch of growth that chips away at economic slack at near recession-era levels.

The Bank of Canada estimates over the past two years the economy’s output gap -- a measure of unused capacity -- has grown from about zero to 1.5 percent of gross domestic product, and that gap won’t close for another two years because of weak global demand for the nation’s exports.

“We’re slowly crawling our way out,” said David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD Securities unit. “I would still venture to say we’re vulnerable to a host of downside surprises.”

GDP probably grew at an annualized pace of 2.5 percent in the three months ended September, the biggest gain since the third quarter of 2011, according to the median estimate of 20 economists surveyed by Bloomberg as of 4 p.m. Toronto time. That’s up from 1.7 percent growth in the second quarter, when the economy was hurt by flooding in Alberta and a construction strike in Quebec. Statistics Canada will release quarterly and monthly GDP figures tomorrow at 8:30 a.m.

Economists project a temporary slowdown to 2 percent in the fourth-quarter before the economy accelerates to average quarterly growth of 2.5 percent in 2014, according to separate estimates compiled monthly by Bloomberg.

Growth Slowed

After an initial burst following the recession, Canada’s economy began to slow last year amid weak global demand for its goods, a slump in business investment and temporary factors such as maintenance shutdowns in the oil industry, flooding and strikes. Canada has averaged annualized quarterly growth rates of 1.3 percent since the start of 2012, less than half the pace seen over 2010 and 2011.

Its labor and financial markets have lagged as a result. The country’s benchmark stock index has risen 7.5 percent this year, trailing the 26.7 percent advance in the U.S. Standard & Poor’s 500 Index. The Canadian dollar has lost 6.3 percent against its U.S. counterpart in that period. The nation’s government bonds are down 1.7 percent in 2013, compared with a 2.3 percent drop for U.S. Treasuries, according to Bank of America Merrill Lynch indexes.

A 126,300 rise in employment so far in 2013 puts the country’s labor market on pace for its third worst annual result in the past 12 years.

Slow Inflation

Inflation -- another gauge of economic strength -- has been below the Bank of Canada’s 2 percent target for 18 consecutive months, the longest stretch outside of recessions since the late 1990s. The weak inflation outlook has assumed “increasing importance” for policy makers, the Bank of Canada said in its last statement on Oct. 23 when it left its 1 percent benchmark rate unchanged. Statistics Canada reported today that Canadian industrial prices in October fell for a second consecutive month.

Slower price gains were one factor that led Governor Stephen Poloz last month to drop language about the need for future interest rate increases.

Net Exports

Whether the economy can tighten economic slack will depend on a recovery in trade. Net exports -- the difference between shipments abroad and imports -- has been a drag on the economy every year since 2009, according to Bank of Canada reports.

Trade was probably the biggest factor restraining third-quarter growth, economists estimate, with Canada averaging trade deficits of C$920 million ($868 million) in the three months ended September, the highest quarterly gap in a year.

“If there are positive surprises ahead then where they are most likely to come” from is trade, said Mark Chandler, head of fixed income at RBC Capital Markets in Toronto. “The swing factor would be improvement in net exports.”

Bank of Canada Senior Deputy Governor Tiff Macklem said in a speech last month the economy will need to expand by at least 2.5 percent in order to begin absorbing the “current material degree” of slack.

To get there, business investment and net exports will need to contribute at least 1 percentage point to growth, he said. The central bank is confident Canada is on that path.

It projects Canada’s expansion will accelerate to 2.6 percent in 2015, of which 1.1 percentage points will come from exports and business investment, closing the output gap by year-end.

“The Bank expects that a better balance between domestic and foreign demand will be achieved over time and that growth will become more self-sustaining,” Poloz told lawmakers on Oct. 29 in Toronto. “This will take longer than previously projected.”

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