Growth After Stimulus

This morning, Statistics Canada reported a robust economic expansion in March and hence in the first quarter of 2010. Although February’s growth was revised down to 0.2%, strong growth of 0.6% in both January and March propelled the quarterly total to 1.5%.

That figure corresponds to an annual growth rate of 6.1%, more than double the 3.0% growth reported south of the border. By contrast, our annual growth rate fell short of the US in the fourth quarter of 2009 (4.9% vs 5.6%).

Today’s data shows that the Canadian economy expanded significantly despite stimulus levelling off. In 2009, government purchases and investments had accounted for a disproportionately large share of economic growth.

In the first quarter of 2010, government purchases and investments increased by only $3 billion, yet overall output increased by $20 billion. While the state continued to make a positive contribution to growth, it is no longer driving growth.

So what did drive growth? One major source was consumer spending, which expanded by $9 billion. However, this figure is not very impressive in proportional terms. Consumers account for nearly two-thirds of the economy, but contributed less than half of economic growth.

The real story was that businesses began restocking their inventories in the first quarter, which also added $9 billion to Gross Domestic Product. While business cut back production and drew down inventories throughout 2009, it is now producing to build up inventories in anticipation of future sales.

Canada’s Gross Domestic Product ($ billions)





 Total GDP 




 Consumer Spending 




 Gov. Purchases 




 Gov. Investment 




 Housing Construction 




 Business Investment 




 Business Inventories 













Business invested $5 billion more in building real estate. While corporate Canada also invested slightly more in machinery and equipment, it invested slightly less in non-residential structures. As a result, corporate investment flatlined (outside of housing.)

International trade was a drag on Canadian growth in the first quarter. The fact that imports increased more than exports reduced growth by $6 billion, completely offsetting the contribution from real estate.

The problem is that neither inventory restocking nor increased housing construction can continue forever. The pessimistic scenario is that, when inventories are stocked to normal levels and the real estate boom slows, we could be left with a rather sluggish economy. Allowing government investment to drop off as stimulus packages expire would make matters worse.

The optimistic scenario is that temporary growth from inventories and real estate will carry the Canadian economy until business investment and/or net exports pick up. The proactive policy response should be to maintain (if not increase) current levels of government investment at least until there is evidence of more sustainable private-sector growth.


  • Based on calculations, one report said household debt as a percentage of personal income probably rose to a record 148 per cent.

    That could explain a lot of this growth, and as you mention combined with the very slow moving stimulus spending that is most likely now just finding its way into the deeper layers of the economy and you have growth.

  • There does not seem to be enough talk about Canadian household debt, 70 percent of which is mortgage-led.

    What kind of effect will the interest rate hike have on new homeowners?

    Carney hinted that the BoC is watching the domestic housing market, but I would love RPE`s thoughts on what seems to be a significant factor in the Canadian context.

    Also notice the Financial Times front page headline this morning: “China urged to act over property bubble.”

    David Harvey`s latest Enigma of Capital (2010) places property at the centre of his analysis of crisis formation. It seems we should do the same, at least here in Canada.

  • I think the front page of the Financial times should have read: “China Acting on it Poverty Bubble”. With a bit of flexibility given to workers to seek a bit higher wages, you might actually see a bit of real wage growth in China. However focusing on property bubbles, amidst a sea of poverty seems like a bit of a side show to me.

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