Canada Rebound After Weak Second Quarter Tops Agenda for Carney, Flaherty
Canada’s economic policy makers may try to bolster investor confidence by telling lawmakers a global slump and market turmoil won’t derail a recovery in the world’s ninth-largest economy.
Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney will appear before a special parliamentary committee hearing, starting at 9 a.m. New York time, on the potential effects of the European debt crisis and U.S. fiscal woes. Canadian stocks sank yesterday and government bonds rallied, pushing yields to record lows, amid growing concern the global economy is slowing.
While acknowledging Canada’s economy may have stalled in the second quarter, Carney and Flaherty will likely cite temporary factors for the slump and highlight the country’s strengths, including spending by companies such as Suncor Energy Inc. (SU) to develop the country’s oil reserves, said Paul Ferley, assistant chief economist at Royal Bank of Canada.
“Do they still sound fairly confident about activity bouncing back in the third quarter?” said Ferley. “My assumption is they will.” He projects growth will recover to a 3.4 percent annualized pace in the July-September period, following growth of 0.5 percent in the second quarter.
Commodity prices are “still historically high” even after recent declines, which should support “stronger capital expenditure relative to most other industrialized economies,” Ferley said in a telephone interview from Toronto.
Investment Spending Higher
Calgary-based Suncor, the country’s largest energy company, plans to spend C$6.7 billion ($6.8 billion) on investments this year, up from C$5.8 billion in 2010, while Canadian Natural Resources Ltd. (CNQ), the second largest and also based in Calgary, plans as much as C$6.6 billion of spending, up from C$5.3 billion last year, according to Bloomberg data.
Carney and Flaherty “are probably going to give a State of the Union,” said Murray Mullen, chief executive officer of Okotoks, Alberta-based Mullen Group Ltd., an oilfield services and trucking company. “Here’s the reality, here’s the facts, Canada is probably going to be okay.”
Lawmakers on the committee say they want Flaherty to elaborate on comments made last weekend, when he said a recession may lead him to consider adding additional stimulus.
“We’d like to hear from the minister and the governor of the Bank of Canada what they think the impact is going to be,” said Peggy Nash, the spokeswoman for the opposition New Democrats on finance issues, by telephone. “Are there fiscal projections going forward going to be changed? What alternatives are they looking at to best buffer Canada?”
Carney hasn’t spoken publicly since July 20, when the central bank issued a forecast that growth had slowed to 1.5 percent in the second quarter, before accelerating to 2.8 percent in the third quarter and 2.9 percent in the fourth quarter. At the time, Carney said risks to the Canadian outlook had “intensified,” including “sovereign debt concerns in Europe.”
U.S. jobless claims climbed by 9,000 yesterday to 408,000 in the week ended Aug. 13, the highest level in a month, while the Federal Reserve Bank of Philadelphia’s general economic index plunged to minus 30.7, the lowest level since March 2009. Morgan Stanley cut its forecast for global growth this year to 3.9 percent from 4.2 percent.
Carney won’t be “doom and gloom” today, said Michael Gregory, senior economist at BMO Capital Markets in Toronto, even though the central banker is likely to acknowledge some of the risks he identified are materializing. “I think everyone understands completely that the Canadian economy is performing OK, despite everything.”
Stocks, Bond Yields Plunge
Investors may not be easily convinced. The benchmark S&P/TSX composite index fell 3.1 percent yesterday on concerns that global growth may be slowing more than anticipated, and Canada’s 10- and 30-year bond yields touched record lows.
Economists had already been shaving their forecasts for second-quarter growth after reports over the past month showed Canada’s economy weakening from refinery shutdowns and supply disruptions related to natural disasters in Japan. The economy expanded at a 0.2 percent annualized pace in the quarter, down from 3.9 percent in the first quarter, according to the median estimate of five economists surveyed this week by Bloomberg. Statistics Canada reports gross domestic product for the second quarter Aug. 31 at 8:30 a.m. New York time.
A temporary slowdown in company spending may exacerbate the slump. Investments by companies that have reported earnings since July 11 rose 22 percent in the latest quarter from a year earlier, down from a 34 percent year-over-year rate the previous quarter, according to data compiled by Bloomberg News. Oil and gas spending, which accounts for about half of the total, increased 6 percent, down from 34 percent in the prior quarter.
Business investment, which makes up about 18 percent of GDP, accounted for almost all of the country’s growth in the first quarter, along with a build-up in inventories.
Spring breakup, when wet weather prevents rigs from working in marshy western Canadian fields, lasted longer than usual this year because of late snowfall. Wildfires also swept across northern Alberta, the biggest energy-producing province. That may augur well for a stronger third quarter as companies rush to make up for delays.
Some capital spending “was deferred because of the fires and the floods slowing down access,” Jason Fleury, investor relations manager at Calgary-based Penn West Petroleum Ltd., said in a telephone interview. “It delayed it somewhat.”
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