GDP Report: Awfully Weak Tea Leaves

Finance Minister Jim Flaherty was unusually blunt on CTV’s Question Period yesterday, saying he was worried about the possibility of another recession.  (Finance Ministers are usually very cautious about using the “r”-word, for fear that might worry consumers an dbring about a self-fulfilling prophecy.)  Maybe he had already seen today’s quarterly GDP numbers from Statistics Canada, which give lots of reason to worry — once you start poking around in the tea leaves.

The headline number seems healthy: real GDP growth of 3.9% (annualized) in the quarter.  It doesn’t take much investigation, however, to take the shine off that seemingly robust number.

For starters, 80% of that growth was due to inventory accumulation.  Take away inventories, and annualized growth was all of 0.76%.  Ouch.  Firms do not produce for inventories for very long.  And once they stop, the resulting inventory decumulation makes the future slowdown all the worse.

More serious than that, however, is what the GDP numbers say about the income and spending of the various sectors of the economy.  The first quarter data indicate clearly that Canada’s free-spending consumers and governments — the very sectors that saved our bacon during the worst of the recession — have now hit the wall.   This reflects the turning off of the stimulus taps (by both government and the Bank of Canada).  The problem is, there’s not nearly enough offsetting momentum being provided by the private sector (through investment and/or exports).  This implies slower growth ahead.

Real current spending by both consumers and government essentially stopped in its tracks in the first quarter.  It’s the first time since spring 2009 (amidst the carnage of the financial crisis) that consumer spending did not grow.  There’s a little bit of forward momentum still in government capital spending, which grew 0.8% in real terms in the quarter (the slowest since the stimulus program was unveiled in early 2009).  But essentially it is clear that the positive boost from the stimulus strategy has now expired.

Total government outlays were also frozen in the quarter.  Spending on tranfers to individuals actually fell by over 3% (or $6 billion in annualized terms), as EI benefits were cut off from some unemployed workers and other transfers were reduced.  That decrease in transfer payments bit into personal incomes, which grew at the slowest pace since the recovery began.  No wonder real retail spending has been falling since November; soaring gasoline prices will make that worse before it gets better.

Canada’s economy continues to be hammered on the international front.  Real imports grew faster than real exports for the 7th time in the last 8 quarters.  And so the current account deficit widened by 30% in the quarter, reaching $13 billion (and totalling over $50 billion for the last 4 quarters).  Obviously, a currency trading at 25% above its purchasing power parity is going to exacerbate this problem, too, in the quarters to come.

Business capital spending provided the only positive light in the sectoral breakdown — and even it wasn’t burning very brightly.  Non-residential capital spending grew 2.9% in the quarter in nominal terms (and 3.2% in real terms, thanks to falling capital prices).  However, business non-residential investment is still well below its pre-recession peak (the only domestic sector to not yet re-attain its pre-recession nominal spending levels).  Worse yet, the corporate sector continues to sock away idle cash: it took in $7 billion more in cash flow than it spent on investment in the first quarter, once again acting as a net drag on the overall inflow-outflow balance of the macroeconomy.  (Of course, with a Conservative majority now moving to further cut corporate income taxes, that accumulation of idle cash will only get worse.)

In short, that is a GDP report that waves all kinds of big yellow flags about the future course of this recovery.  Consumers and governments are tapped out, and their spending binge is over.  Net exports are falling.  Business investment is not nearly vibrant enough to pick up the slack.  Where will future growth come from?  Someone has to be borrowing and spending, for demand to expand and the economy to grow.  Everyone is acknowledging the second-quarter numbers will be much weaker (given weak data on manufacturing shipments, trade, and employment in the last couple of months); I wouldn’t be surprised if second-quarter GDP turns out to be negative.

All this should lead Mr. Flaherty (and provincial finance ministers) to fundamentally reconsider the austerity track onto which they are steering Canada’s fiscal policy.  Merely by freezing government spending, Canada’s real economic momentum has been considerably undermined.  If we actually start cutting back in any significant way, watch out.  Combined with the fitful uncertainty which still grips Canada’s private sector, that would be enough to turn Mr. Flaherty’s worry about another recession into a reality.


  • How does Canada exit stimulus or the U.S. exit quantitative easing without triggering recessions? How long will we (and others) trust our currencies if we continue to use fiscal and monetary stimulus to avoid recession?

  • definitely some very strong signals and without any plan but a move to austerity, the debate about whether the great recession actually ended and is now starting to turn towards the 3rd great depression should be making it historical pledge to history writers.

    The way out? Here is the way out- public and private investment into a dramatically different world where long run sustainability is the goal and not shortermism of financials.

    What does that mean- a grand investment by the public and private into renewal of the economic foundations for social and environmental renewal.

    A vision, a plan, and an infrastructure to carry it out.

    But first a realization that markets cannot do perform such feats, a realization that if we hit the wall again, there will be no capacity for bail outs- the too bug to fail will fail, and then the really too big to fail could fail.

    We cannot let that happen, and we need a vision with a leader that can muster the plan and develop the infrastucture. We blew it the first time, hand outs to the banks with (bankers allocating the money) and zero plan shovel ready stimulus and not nearly enough stimulus. Auto sector was about the only legitimate investment that actually paid off somewhat.

    There is a pathway out, and as progressives we need to be able to get that out a lot more clear and in concrete.

    But the first up is ideas and vision- markets cannot do this themselves- we do need a plan which means regulation. And that task we could be stuck on for a few years yet. However if it gets bad enough, we need to be ready.

  • Paul,

    What I see is that the globalization of capital is leading to the harmonization of global wage rates. The next step needs to be globalization of organized labour, so that the same wage is paid in Windsor or Shanghai or Mumbai. Only organized labour will reverse the race to the bottom on wages (currently fought through competitive currency devaluations).

  • Roy wrote:

    “What I see is that the globalization of capital is leading to the harmonization of global wage rates. The next step needs to be globalization of organized labour, so that the same wage is paid in Windsor or Shanghai or Mumbai.”

    Hold that one thought and conclusion. Now imagine “that the same wage is paid in Windsor or Shanghai or Mumbai” is Mumbia determined.

  • this kind of goes back to what we were saying in another post about Vale and the USW and the argument for tougher labour legislation to equip labour to take on the multinationals.

    So if Roy’s statement is to be used for a guidepost, then we would need a whole lot of cooperation and uniformity on the labour legislation front by different companies as they operate in a diverse non-uniform IR environment.

    However the reality is, we are going in the opposite direction, as the many forces of globalization has expanded the reach of multinationals, it has been a race to the bottom, and now even those industries that seemingly had some kind of locational aspect, the new attitude, at least in the case of Vale is to break the unions. It is very far away form unifying of labour standards.

    It will take a whole lot of regulation of trade or other measures to somehow take labour out of the equation. And lets look at the logic of most advanced resource extraction like what Vale has in place, the labour costs are hardly a the number one variable in the competition equation, yet the multinational chooses to beat up labour and defy them at every angle. So potentially we need a whole lot tougher international law to help unions organize and achieve such uniformity in wages and working conditions.

    Course I also want a vehicle that runs on CO2.

    The tech for either objective just is not there.

    AS it would take a whole lot of technology to convince CEOs and corp execs not to beat on labour. ( I am thinking some kind of brain matter transformation device). Or we could hire some Sons of Vulcan.

  • Randy Robinson

    In the 2011 Ontario Budget, McGuinty and company kept infrastructure spending at a stimulus-level level of $12.8 billion, along the same lines as the $12 billion in 2009 and the $14.1 billion in 2010 (see p. 10 of the Budget). That’s pretty serious support for provincial GDP. Interestingly, the Liberals judged that a faltering economy in an election year was far more politically dangerous than a $16.7 billion deficit. It was a significant decision, given that just returning infrastructure spending to 10-year average levels would have knocked $6 billion or so off said deficit.

  • Given that the policy interest rate is 1%, unchanged from October, it seems a trifle strong to say that the Bank of Canada is turning off the stimulus taps … though perhaps more should be done to counter the very high exchange rate via quantitative easing? Is that what you had in mind?

  • I can live with wage rates negotiated in Mumbai by my global union representatives. We need to relearn that we have more in common with a Mumbai auto worker than with the Wall Street venture capitalist with the politicians in his thrall.

  • Andrew? Is that really you. Are we not seeing an end to many programs that were implemented. are we not hearing a lot of talk about taking an axe to the public service? Are we not hearing talk that indeed rates could be going up, and that the banks are already in the process of raising rates despite the boc.

    And yes how about that .25$ above ppp too high dollar that is practicing scorched earth tactics on manufacturing?

    How about the expanse of precarious work, I say we are seemingly quite a distance from recovery than what the trolls in the Tory party make it out to be. How about the prices that have come about because of the recession, where every commodity, including food seems to have been turned into a speculative vehicle? Have you seen the variance in prices over the past two years? Potentially the words should have been, now that Harper has a majority, you can plan on him ripping the taps out!

  • Andrew was asking whether the Bank of Canada has ended its “stimulus” or not, given how low interest rates remain. Good question. Here the issue I was raising is not the level of interest rates. Rather I was pointing out that their stimulative effect may have run its course — particularly on consumer spending. This may be what some observers (including Chris Ragan) have been hinting at, with the concept that the new “neutral” interest rate is lower than before. Heterodox thinkers, of course, reject any idea of a “natural” interest rate (as underpins the orthodox notion of a neutral monetary policy). And we have generally been skeptical of the overall power of interest rates to predictably regulate aggregate demand (especially when confidence is weak, low interest rates are like pushing on a string). So in that sense, the Bank’s actions sparked a temporary surge in consumer spending (including on houses), but that stimulative effect may have run its course.

  • Actually I thought Andrew was referring to the government in general. My mistake.

  • Some discussion on the validity of Minsky’s theories as they relate to the descent into a liquidity trap would be useful.

  • andrew jackson

    Thanks for the response Jim. I think a corollary might be that we badly need continued fiscal stimulus since what monetary policy can do moving forward is quite limited. I am still a bit surprised that QE for Canada is rarely raised as an option.

  • Yes sorry Andrew, I guess I take a lot of faith in your remarks and somehow read your comment the wrong way got me going a bit.

    Just wanted to add one thing into this mix, with the budget coming out, the pricing issues that I mentioned, are being felt and will have further effect when the prices diffuse further down the chain.

    That is have a look at almost every commodity price since the start of the great recession. For almost every major commodity there is a unprecedented amount of variance and with a trend to rising. Some such as staples corn, sugar, rice, coffee, and others oil, gold, silver, nickel, steel there prices are now all near or approaching their peaks. I know our higher dollar is somewhat mitigating these price rises, but at we are beginning to see these will have baseline effects on segments of the population least able to cope.

    The budget needs to address these price pressures and somehow targeted relief needs to become a focal point for segments of the population. And these are not inflationary pressures that can be dealt with by raising rates, but stagflation pressures being pushed along by commodity speculation. There is no doubt speculative pressures, are adding onto the rises, and whether these are due to traditional scarcity pressures of commodities is subject to debate. The EU last week announced some new controls need to be placed on commodity speculation.

    I know that Canadian resource companies are doing quite well with such stellar price rises, but we also have plenty of the population on the losing end of this equation, and I would argue from a social standpoint it is a negative sum in terms of net benefits.

    However, we hear just about nothing on this from our current government- just more for the resource extraction components of the economy.

    There is a growing divide in this country, a split that is forming wider and wider every economic day, and the window dressing covered up by the stimulus over the past 3 years, is about to come off. There is a danger however, will the Ontario and Quebec economies, especially manufacturing be the sacrifical lamb for the resource economy. Is the industrial heartland supposed to be on permanent life support? That is what it is seeming to be trending towards. Quality of life sure takes a beating when life support is the best we can do.

    We have a fairly divided country as it is, this new and growing economic divide is something I truly believe this country cannot withstand. And yet Harper’s budget shows very little in addressing this divide.

  • The idiotic reformist left made the faustian deal with the devil and now it has to pay for it, progressives I’m sorry to say it – are fools.

    You preach government solutions to a system that needs to be overthrown, if the rampant corruption of the US political system isn’t evidence enough that regulation and reform has been a total failure I’m not sure what is!

    Reforming capitalism has failed on a fundamental level, it’s time to take back revolutionary action.

    As always the educated middle class lives too comfortable and lives in it’s own “civilized myopia” of a barbaric world and it wants to negotiate with barbarism.

  • Re Quantitative Easing (QE) for Canada:
    The US federal Reserve instituted QEII to lower long term interest rates (and increase asset prices) hoping to get more investment and consumption out of that. It made little difference. The US has a problem of inadequate aggregate demand that cannot be resolved by tweaking interest rates.

    Yesterday’s close for the 10-year Canada bond was 2.99%. It’s hard to see how a small decrease effected by QE would lead to an increase in aggregate demand. BTW, if the Bank of Canada did want to lower long term interest rates the simplest way would be to state the rate it wanted, say 2%, and declare it would buy bonds on secondary markets at that rate if need be. That statement itself would probably be enough to force rates down to that level without any appreciable buying of bonds.

    Given the weak trends in first quarter GDP, Canada clearly needs more federal government spending to reduce unemployment and possibly avoid another recession if it comes to that.

  • Tito wrote:

    “As always the educated middle class lives too comfortable and lives in it’s own “civilized myopia” of a barbaric world and it wants to negotiate with barbarism.”

    True that! But you should see the way we behave when we are not comfortable. More often than not we turn hard right, not hard left. Historically in advanced capitalist countries there is a link between the extent that progressive reformers can make life easier through their efforts and the traction a more radical politics has gotten. And as the last thirty years have shown, as progressive policies have been rolled back and the middle class has become less comfortable the more to the right politics has moved.

    We need more progressive reformers (and radicals) right now not less.

  • yes, the way things are going, it’s as if Jesus Christ was a right winger and somehow he preached such hard right philosophy, hard work, frugality, individualism and somehow love thy neighbour.

    oxy moron of the day

    religious right.

    I like his philosophy- a true hippie. I just do not understand how the believers reconcile it all especially in near US south. Moral fiber needs a rethink.

    As the US job numbers depicted today , seems like those tea leaves mentioned above could be a whole lot weaker as the US economy is potentially on the retreat. That is two reports in a row that raise an eyebrow.

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