The Week Reviewed by TD Economics


November 4, 2011 from TD Economics


It was an up and down week for Canada. On Monday, the GDP report for August showed that Canada, following on the heels of its neighbour, turned in a surprisingly strong showing. Today’s employment report for October suggests, however, that the economic momentum is unlikely to have staying power as some of the anxiety about Europe and recent gut wrenching market volatility has started to pull down confidence.


This week’s GDP release indicated that the economy posted a solid 0.3% M/M increase in August. This performance was reinforced by the fact that it came on the heels of an upwardly revised GDP growth rate in July, from 0.3% to 0.4%. Combined, these results place third quarter GDP on track for an annualized growth rate of 2.5%, an estimate which surpasses TD Economics’ and the Bank of Canada’s expectations of 2.1% and 2.0%, respectively.


While the overall performance of GDP was sturdy in August, growth was largely driven by a 2.8% M/M increase in output within the energy sector. What’s more, the upward revision to July’s GDP performance was attributed to a 1.0% upward revision in mining, and oil and gas extraction. Given these sectors’ vulnerability to a weaker global economic outlook, we expect their contribution towards GDP growth to fade in the near future. The adverse effect of the weaker-than-expected global macroeconomic environment will also permeate other export-oriented industries and weaken prospects for net exports in general.


The levers of growth on the domestic front will also be tested over the coming months. Business investment - which declined in the second quarter - can be expected to remain depressed in the near term. The sharp drop in equity markets over the summer and fall months, and the ensuing deterioration to household wealth will limit the prospects for growth in consumption (an impact that is commonly coined as a "negative wealth effect"). Consumption will be further limited by low confidence levels and the subdued pace of employment gains, which should temporarily lead to a rise in the unemployment rate.


This morning’s Labour Force Survey (LFS) suggested that global developments may be starting to hurt business confidence and hiring, with roughly 54K jobs having been lost in October, all of which were concentrated in full-time positions. Looking at the last three months’ average shows that employment growth has virtually stalled.


Looking ahead, much of the anticipated weakness in the labour force will come as a result of the fallout of the European sovereign debt crisis, which will indirectly affect our economy through diminished confidence. As highlighted by Bank of Canada Governor Carney and Senior Deputy Governor Macklem in their appearances before parliamentary committees this week – subsequently to the release of its Monetary Policy Report (MPR) last week – an impending short recession in the euro zone is in sight and the key downside risk to the economic outlook is the potential impasse of a resolution to the European crisis.


At the time of this writing, the S&P/TSX was clawing its way back from the dramatic drop on Monday and the Canadian dollar was down by close to 2 cents against the U.S. currency. Given the limited number of good economic data, many would consider this an acceptable week after all.





Shahrzad Mobasher Fard, Economist 416-944-5729

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Heather Hisey, Sales Representative; Lezlie McDermott, Sales Representative; Anne Wills, Sales Representative;

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CENTURY 21 Miller Real Estate Ltd., Brokerage*

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