Bottom Line
- Canadian real GDP by industry bounced back 0.2% in June.
- The increase in economic output was led by the second consecutive 0.6% advance in the goods-producing industries, which was primarily driven by a significant jump in manufacturing activity.
- Output in mining and oil and gas extraction fell 0.8% in the month.
- Industrial production expanded for the 10th consecutive month.
- Output from services-producing industries increased 0.1% after declining for two months.
- Going into the third quarter, soft growth is expected to continue on the services side of the economy as the slowdown in new and existing home sales weighs on the sector's output.
Outlook
Canadian real GDP by industry rebounded 0.2% in June, in line with our forecast. The gain in output is definitely an improvement from zero growth in April and the 0.1% increase in May.
Overall real growth in the second quarter of 2010 decelerated dramatically to 2.0%, down from 5.8% in the first quarter.
The June increase in economic output was led by the second consecutive 0.6% advance in the goods-producing industries, which was driven mainly by a significant jump in manufacturing activity. Manufacturing output advanced 1.3% in the month, led by a strong gain in durable goods, namely machinery, fabricated metal, and computer and electronic products. Non-durable goods manufacturing climbed 0.5%, boosted by pharmaceutical products.
Ending a five-month string of solid advances, output in mining and oil and gas extraction fell 0.8% in June. The declines were widespread, with reduced output in natural gas production, copper, nickel, lead and zinc mine production, potash mine production, and the support activities for mining and oil and gas extraction (down 4%). Despite the decline in mining and oil and gas extraction output, industrial production output handily increased 0.6%, marking the 10th consecutive month of expansion.
Output from the services-producing industries increased 0.1%, following two months of declines. Advances in retail trade (up 0.7%), administrative and waste management services (up 0.8%), and arts, entertainment, and recreation (up 1.0%) led the overall increase. Meanwhile, there was a 0.2% contraction in finance, insurance, and real estate as a drop in existing home sales caused results for real estate agents and brokers to fall a sharp 7.1% in the month.
Economic output growth in Canada is decelerating; we now expect growth to subside to near 1.5% in the third quarter of 2010. Meanwhile, downside risks to growth in the second half of 2010 are clearly rising in both Canada and the United States. In particular, the sharp slowdown in U.S. domestic demand that is already in progress is expected to exert a major drag on Canadian exports in the second half of 2010.
In addition, with the recent Bank of Canada monetary-tightening shock, and the provincial fiscal drags connected with the harmonized-sales-tax hit in the second half of 2010 in British Columbia and Ontario, the outlook for Canadian economic growth is somewhat murky, and even troubling. At this point, it is extremely likely that the Bank of Canada will hold rates steady on September 8.
by Arlene Kish and Brian Bethune