Second-quarter Canadian GDP looks grim and it’s not just oil

Bloomberg

Canada’s economy was already on track to crumble in the second quarter as the Alberta wildfires last month took more than 1 million barrels of oil a day out of production. When you add in details from Tuesday’s report on first-quarter gross domestic product, the outlook becomes dismal.
Here are some of the reasons the economy doesn’t appear to have much going for it:

Oil, Part I
GDP contracted 0.2 percent in March, closing out the first quarter with a thud, mostly due to a 2.8 percent drop in the oil and mining category. With crude prices still less than half what they were in mid-2014, there’s little chance of a major comeback.
“I don’t expect great things from the energy sector and investment more generally,” said David Tulk, chief Canada macro strategist at Toronto-Dominion Bank’s TD Securities unit, who predicted GDP could shrink by as much as 1 percent in the April-to-June period. “The second quarter is going to be very ugly, there’s no two ways about it.”

Oil, Part II
The Bank of Canada estimated on May 25 lost oil production would carve about 1.25 percentage points off the second-quarter growth rate, which it estimated earlier would be 1 percent. Other things being equal, a second-quarter contraction would be an unwelcome flashback to 2015, when output shrank in the first half, prompting Governor Stephen Poloz to cut interest rates in January and July to cushion the blow.
Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce in Toronto, sees a 0.7 percent contraction in the second quarter, compared with a previous forecast for a 0.5 percent expansion before the wildfires.
Some elements of the January-to-March GDP report are fueling doubts about the second quarter. Take the 2.3 percent gain in consumer spending, for instance. The advance was spurred by record debt loads and low interest rates. Home prices at record levels in Vancouver and Toronto have prompted warnings from the International Monetary Fund and Canadian regulators. Consumer spending “is unlikely to be sustained,” said David Madani of Capital Economics in Toronto, and a former senior researcher at the Bank of Canada.
Exports
The only other major source of first-quarter growth was a 6.9 percent jump in exports tied to an early burst of automobile production. Separate reports on Canada’s monthly trade balance — which showed a record deficit in March — suggest the momentum faded at the end of the quarter. Canadian factories have been slow to rebuild orders even in periods of a weaker Canadian dollar and a U.S. recovery, which used to augur a rebound north of the border.
The median Bloomberg forecast is for export growth to slow to 0.4 percent this quarter. “The sharp deterioration in trade, and what that means in advance of the wildfire shocks, that will only add to the downside,” said Derek Holt, Scotiabank’s vice-president of economics in Toronto.

Government Spending
Prime Minister Justin Trudeau delayed his budget including C$29.4 billion ($22.5 billion) of deficit spending, until late March, after his October election win. That means many construction projects won’t get going until towards the end of this year, too late to bolster second-quarter GDP figures.

Business Investment
Non-residential investment fell for a fifth straight quarter between January and March and economists project it will decline by another 1.6 percent this quarter. In fact, the whole year may be a bleak one in terms of capital spending: investment intentions are down 4.4 percent this year, compared with 2015, led by energy and manufacturing, Statistics Canada reported last month.