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Globe and Mail Economy edges higher

Economy edges higher

KEVIN CARMICHAEL AND TARA PERKINS

Globe and Mail Update

August 29, 2008 at 9:35 AM EDT

OTTAWA, TORONTO — Canada's economy rebounded in the second quarter, as consumer spending and surging business profits helped the country avoid a recession.

Gross domestic product increased at an annual rate of 0.3 per cent in the three months that followed a first-quarter contraction of 0.8 per cent, Statistics Canada reported Friday.

The technical definition of a recession is two consecutive quarters of declining economic output.

While the report will shield Finance Minister Jim Flaherty from charges that his policies have led Canada into the first recession since 1991, the figures confirm the economy effectively stalled in the first half of the year.

The first quarter economic contraction was revised downward to 0.8 per cent, from the 0.3 per cent drop Statscan had reported earlier.

At a news conference Friday morning at Toronto's airport, Mr. Flaherty said that the pace of economic growth remains slow, as expected, because of troubles in the U.S. economy.

“We are facing some economic challenges,” the Finance Minister said, emphasizing that it's a global situation and not unique to Canada.

“We are feeling the impact of global economic factors, including a struggling U.S. economy,” Mr. Flaherty told reporters.

He added that he believes solid growth in income and employment should help to support the economy, and that Canada is better positioned than most countries to weather the economic slowdown.

Friday's GDP report showed that consumer spending grew 0.6 per cent in the second quarter, slower than the 1.8 per cent pace set in the first quarter.

Corporate profits climbed 8.3 per cent, the biggest increase since 2004, as oil companies and farmers benefited from record commodity prices.

Exports fell 1.5 per cent from the first quarter, as U.S. demand for automobiles and lumber continued to fade.

Canadian shipments abroad have declined for the past four quarters, and the level of exports is 4.7 per cent lower than a year ago, Statscan said.

Confirmation of the weakest economic growth since that 1991 recession comes at a bad time for Prime Minister Stephen Harper, who is considering forcing a snap election as early as next week, arguing that Canada's minority Parliament has become dysfunctional.

Mr. Harper, an economist by training, appeared to anticipate grim news, telling reporters Thursday that he wouldn't get hung up on the textbook definition of a recession, arguing that economic fundamentals such as the labour market remain sound.

“People talk about a technical recession,” Mr. Harper said in Inuvik. “Even if that's true, I don't think it's a real recession.”

Most economists on Bay Street were expecting growth in the second quarter, though at a rate of less than 1 per cent.

The central bank also was bracing for bad news. Bank of Canada Deputy Governor David Longworth said in a speech this week that growth in the second quarter likely would be “somewhat weaker” than the 0.8 per cent annualized rate he and other policy makers predicted in July.

As Canada faltered in the second quarter, U.S. GDP growth surged to an annual rate of 3.3 per cent, according to a revised government estimate released Thursday.

Mr. Flaherty said he believes U.S. growth is being powered by a significant increase in exports, and the temporary stimulus that was provided by government tax rebate cheques.

Canadian domestic demand is stronger than that in the U.S., Mr. Flaherty said, adding that he's comfortable there will be modest economic growth in this country over the balance of the year.

“We're on track budget wise,” he said.

Few economists expect the pace of U.S. growth to last, boding ill for the prospects of a quick Canadian revival. The U.S.'s gain in the second quarter was due almost entirely to exports, which likely will decline over the second half of 2008 because demand in Europe and Japan is in retreat.

Both those economies contracted in the second quarter, presenting the possibility of recession in some of the world's richest economies.

Still, Bank of Canada Governor Mark Carney is unlikely to cut interest rates next week as a result Friday's figures, most economists say.

The central bank anticipated a rough patch back in the spring, cutting its borrowing costs by a full percentage point over two meetings in March and April.

Mr. Carney has since left the Bank of Canada's benchmark interest rate unchanged at 3 per cent at meetings in June and July, saying the risks posed by weaker growth and higher inflation were balanced.

A measure of inflation in Statscan's GDP report soared to its highest since 1982 because of higher commodity prices, according to Dawn Desjardins, an economist at Royal Bank of Canada. Energy prices are now in retreat, but concern about price increases likely will keep the central bank from lowering rates, Ms. Desjardins said.

“Against this backdrop, the bank is unlikely to discount the upside risks to the inflation outlook until there are clearer signs that these elevated inflation readings will not fuel a pickup in inflation expectations,” Ms. Desjardins said in a note to clients.

There were some positive glimmers in the latest GDP figures.

Imports increased 0.6 per cent in the second quarter, reversing a decline in the previous quarter, suggesting businesses are taking advantage of a stronger currency to upgrade equipment they can't buy at home.

Personal disposable income increased 1.1 per cent in the quarter, Statscan said.

But most other aspects of the report paint a picture of a stagnant economy. Business investment in residential construction dropped 1 per cent, following a 1.7 per cent decline in the first three months of the year.

And even as more businesses increased their imports of machinery and equipment, overall investment in plants and equipment declined by 0.4 per cent in the quarter.

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