TD Economics
Data Release: Canadian Real GDP surprises on the upside in November
* Canadian real GDP rose 0.4% in November, almost double the pace markets were expecting, and the strongest growth rate in almost nine months. The headline number likely masked underlying trends, as plant reopening in the mining and oil and gas (+1.3%) industry bolstered real GDP growth, while restructuring in the auto industry (-15.6%) weighed heavily on growth in the month. Looking beyond temporary factors, on a year-over-year basis, real GDP growth cooled to 3.0%, from 3.4% in the prior month, continuing a 9-month moderating trend.
* Outside of temporary factors, signs of strength emanated from the service sector (+0.5%), with strong gains in retail trade (+1.4%), and finance insurance, and real estate (0.6%). Both have come roaring back, following a 9-month breather following the robust strength seen in late 2009, and early 2010. The gains in finance, insurance and real estate can likely be linked to the renewed strength in the existing home market experienced in late 2010. Gains in other services were much more muted in the month.
* Excluding the temporary drop in motor vehicle production, the goods producing sector weighed heavily on growth in the month. Construction (-0.4%) fell for a second consecutive month, driven by weakness in new home building. Manufacturing excluding auto production (-0.2%) was lackluster in the month. Manufacturing output has fallen in four of the last five months, as this sector struggles to pull its way out of the rubble caused by the 2008/2009 recession.
Key Implications
* November's gain puts real GDP growth on track for 2.3% in the fourth quarter of 2010, in line with our and the Bank of Canada's expectations. This underscores our view that the drop in real GDP growth to 1.0% was temporary, and the Canadian economy should continue at a slightly faster, but still gradual pace over the next year.
* We anticipate that the strength in the service sector may be short-lived. The service sectors continued to benefit from strong domestic demand, and extremely low interest rates, led by the Canadian existing housing market. Since, we have seen signs of cooling on that front, and going forward we expect housing activity to be moderate at best. In addition, the most recent changes to mortgage insurance rules should work to dampen demand in the existing home market. A cooling housing market, coupled with high household debt levels is likely to slow growth in the service sector and construction output through 2011.
* Meanwhile, the goods sector should continue to benefit from strong global demand for Canadian resources, such oil and gas. But excluding the resource sector, manufacturing will continue to face significant challenges, particularly in the wake of a strong Canadian dollar, and increased competition from low-cost global players.
Data Release: Canadian Real GDP surprises on the upside in November
* Canadian real GDP rose 0.4% in November, almost double the pace markets were expecting, and the strongest growth rate in almost nine months. The headline number likely masked underlying trends, as plant reopening in the mining and oil and gas (+1.3%) industry bolstered real GDP growth, while restructuring in the auto industry (-15.6%) weighed heavily on growth in the month. Looking beyond temporary factors, on a year-over-year basis, real GDP growth cooled to 3.0%, from 3.4% in the prior month, continuing a 9-month moderating trend.
* Outside of temporary factors, signs of strength emanated from the service sector (+0.5%), with strong gains in retail trade (+1.4%), and finance insurance, and real estate (0.6%). Both have come roaring back, following a 9-month breather following the robust strength seen in late 2009, and early 2010. The gains in finance, insurance and real estate can likely be linked to the renewed strength in the existing home market experienced in late 2010. Gains in other services were much more muted in the month.
* Excluding the temporary drop in motor vehicle production, the goods producing sector weighed heavily on growth in the month. Construction (-0.4%) fell for a second consecutive month, driven by weakness in new home building. Manufacturing excluding auto production (-0.2%) was lackluster in the month. Manufacturing output has fallen in four of the last five months, as this sector struggles to pull its way out of the rubble caused by the 2008/2009 recession.
Key Implications
* November's gain puts real GDP growth on track for 2.3% in the fourth quarter of 2010, in line with our and the Bank of Canada's expectations. This underscores our view that the drop in real GDP growth to 1.0% was temporary, and the Canadian economy should continue at a slightly faster, but still gradual pace over the next year.
* We anticipate that the strength in the service sector may be short-lived. The service sectors continued to benefit from strong domestic demand, and extremely low interest rates, led by the Canadian existing housing market. Since, we have seen signs of cooling on that front, and going forward we expect housing activity to be moderate at best. In addition, the most recent changes to mortgage insurance rules should work to dampen demand in the existing home market. A cooling housing market, coupled with high household debt levels is likely to slow growth in the service sector and construction output through 2011.
* Meanwhile, the goods sector should continue to benefit from strong global demand for Canadian resources, such oil and gas. But excluding the resource sector, manufacturing will continue to face significant challenges, particularly in the wake of a strong Canadian dollar, and increased competition from low-cost global players.
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