Posted by: Daryl & Wendy Ashby | April 2, 2011

How Are We Doing Nationally


From political tensions in the Middle East to the earthquake in Japan, international developments kept markets busy in March. The month ended on a relatively calmer note. 


That is not to say that news abroad did not filter down into investor activity, but the volatility of just a few weeks ago has seemed to take a temporary respite. On the domestic front, it was a fairly quiet week with only a handful of new data. While we review the outcomes of these releases next, it seems like an opportune time to reflect back on the month as a whole and take note of the trends solidifying.  

To start the ball rolling, national GDP numbers were published yesterday. These revealed that the economy hit the ground running in 2011, with a 0.5% M/M gain in January. With this jump-start, a solid advance is pegged for Q1 2011 (3.8% annualized) and would follow an equally impressive showing (3.3% annualized) in Q4 2010. Both of these quarterly forecasts are about a percentage point higher than those included in the Bank of Canada’s January Monetary Policy Report. As such, we anticipate upward revisions in the April edition of the report to be released in two weeks’ time. Even with the upside surprise to central bank projections, we stand behind our call for a July interest rate hike. In short, a Canadian dollar above parity and relatively subdued inflationary expectations do not pressure for an earlier rate increase schedule. Underpinning our overall economic outlook for 2011 and 2012 is a rotation in the drivers of growth away from domestic demand elements to the export sector and business investment. Starting off with the domestic side, the 2011 government budget season has confirmed intentions to wean economies off of temporary fiscal stimulus measures. Some governments have opted to increase their taxes on consumption and income to help rein in deficits. Fiscal restraint of this sort and interest rate hikes on the horizon will serve to curtail consumer spending. We saw this trend further take hold with January’s retail sales (-0.3%) showing a second consecutive month-over-month decline. Households’ reluctance to spend, especially with tighter mortgage eligibility rules, will spill over to the housing market. February housing data showed modest M/M declines in resale activity (-1.6%) in nearly two-thirds of local markets across the country. The average house price gains in this same month (2.5%) were concentrated in a handful of markets and were generally lower than numbers posted during the first phase of the recovery.  
With domestic demand moving to the back-burner, export activity is expected to ramp up given the firming recovery taking hold stateside. This morning’s release of U.S. employment for March (+216K) is in line with the gradual improvement we are expecting. Canadian manufacturers should be well positioned to benefit. In January, manufacturing sales climbed by 4.5% M/M, well above consensus. While a Canadian dollar in the range US$1.03-1.04 in 2011 will represent an obstacle to overcome for exporters, it should fuel expenditure in new machinery and equipment priced in U.S. dollars. The persistence of a high loonie will thus make capital spending an important part of the economic makeup over the near-term.  
All told, activity in March confirmed that the baton driving economic growth is being passed from the public sector and households to businesses. Heading into the second half of this year, we expect this compositional shift to become more fully entrenched.  
Sonya Gulati, Economist, 416-982-8063





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