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Canadian Economy Continues to Show Signs of Weakness

The Canadian economy continues to show signs of weakness. Statistics Canada reported that the Canadian gross domestic product (GDP) advanced just 0.4% in the first quarter of 2019. In the fourth quarter of 2018, the Canadian economy expanded a paltry 0.3%. While the Bank of Canada predicts the economy will pick up in the second quarter, those expectations could be based on faulty assumptions.

Statistics Canada announced recently that the country’s economy expanded just 0.4% on an annualized basis, in the first quarter. In the fourth quarter of 2018, Canada’s economy slowed to just 0.3%.1

In 2018, Canada’s GDP expanded a measly 1.8%; in 2017, GDP was 3%. Despite a new budget and raft of federal spending, the Canadian economy is not showing signs of growth. This represents the weakest back-to-back quarters of growth since 2015.

Statistics Canada said the country’s economic headwinds came from weakness in net trade, with imports increasing 1.9% and exports dropping 1%. It was the first quarterly decrease since 2017. Exports of farm and fishing products fell 9.5% and crude oil shipments dropped 2.8%.

There is, according to Statistics Canada, a bright side. GDP growth, no matter how slight, was fuelled by household spending and business investment. Both of which are expected to help boost Canada’s GDP throughout the rest of the year.

There are some issues with that assumption, however. First, consumer spending may be up, but much of that spending is being backed by credit cards. Canadian household debt is at record levels and more and more Canadians are unable to make ends meet with 53% of Canadians living paycheque to paycheque.2 It’s going to be tough to expect debt saddled Canadians to help boost GDP.

Second, there are fears that Canadian GDP could take a hit from a trade war between the U.S and China and Mexico. Canadian GDP is also being dragged down by lower oil prices. A full blown trade war would hurt Canadian investments and exports. Moreover, because of U.S. tariff threats with Mexico, the chances of a new trade deal between Canada, Mexico, and U.S being ratified this year is pretty remote. That will deal the Canadian economy another blow.

While the Bank of Canada is expected to leave its benchmark interest rate unchanged, underwhelming GDP data from Statistics Canada means governor Stephen Poloz could actually reduce its lending rate. Which would also be bad for the Canadian dollar.

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Sources:

  1. “Gross domestic product, income and expenditure, first quarter 2019,” Statistics Canada, May 31, 2019; https://www150.statcan.gc.ca/n1/daily-quotidien/190531/dq190531a-eng.htm.
  2. “Credit in Canada,” Refresh Financial, January 2019; https://refreshfinancial.ca/wp-content/themes/refresh/images/bankruptcy/pdf-guide/CreditInCanada_guide.pdf.

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