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.Â (Finance Ministers are usually very cautious about using the “r”-word, for fear that might worry consumers an dbring about a self-fulfilling prophecy.)Â 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.Â 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.Â Take away inventories, and annualized growth was all of 0.76%.Â Ouch.Â Firms do not produce for inventories for very long.Â 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.Â 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.Â Â This reflects the turning off of the stimulus taps (by both government and the Bank of Canada).Â The problem is, there’s not nearly enough offsetting momentum being provided by the private sector (through investment and/or exports).Â This implies slower growth ahead.
Real current spending by both consumers and government essentially stopped in its tracks in the first quarter.Â It’s the first time since spring 2009 (amidst the carnage of the financial crisis) that consumer spending did not grow.Â There’s a little bit of forward momentum still in government capital spending, which grewÂ 0.8% in real terms in the quarter (the slowest since the stimulus program was unveiled in early 2009).Â 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.Â 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.Â That decrease in transfer payments bit into personal incomes, which grew at the slowest pace since the recovery began.Â No wonder real retail spending has been falling since November; soaring gasoline prices will make that worse before it gets better.
Canada’s economyÂ continues to be hammered on the international front.Â Real imports grew faster than real exports for the 7th time in the last 8 quarters.Â 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).Â Obviously, a currency trading at 25% above its purchasing power parity is going to exacerbate this problem, too,Â 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.Â Non-residential capital spending grew 2.9% in the quarter in nominal terms (and 3.2% in real terms, thanks to falling capital prices).Â 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).Â 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.Â (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.Â Consumers and governments are tapped out, and their spending binge is over.Â Net exports are falling.Â Business investment is not nearly vibrant enough to pick up the slack.Â Where will future growth come from?Â Someone has to be borrowing and spending, for demand to expand and the economy to grow.Â 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.Â Merely by freezing government spending, Canada’s real economic momentum has been considerably undermined.Â If we actually start cutting back in any significant way, watch out.Â 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.