Running on Fumes

StatsCan released the first-quarter GDP numbers this morning, and the deafening silence you hear is of champagne corks not popping.

Quarterly growth was 0.5% (1.9% annualized): uninspiring but not disastrous.  Erin Weir has aptly pointed out the leading role of government spending cuts in dragging down growth.  Erin noted that government current consumption fell 0.4% in the quarter.  Government investment fell even more (1.4% at seasonally adjusted annual rates).  Together, both forms of government spending declined 0.6%.  Without the cutbacks in government outlays, total GDP growth for the quarter would have been a third stronger.  Business non-residential capital spending grew 1.2% — but is still $5 billion (real) dollars below its pre-recession peak.  Business is the only sector of the domestic economy doing less real spending than they were before the recession, and this has held back our recovery tremendously.

In fact, there’s one interesting way in which all of these lacklustre numbers actually overstate the vibrancy of GDP during the first quarter.  We know from the monthly GDP series (at basic prices) that things got worse as the quarter went along.  GDP declined in February, and bounced back only partially in March.  Curiously, real GDP in March was exactly the same (save a rounding error) in March as it was in December: 1.281 trillion dollars ($2002 chained).  How, then, do we end up with a positive quarterly growth number, anemic as it was?

Because we average GDP over a quarter, we get credit in this quarter for some of the growth that happened in the last quarter.  Even with zero growth during the quarter, the overall quarterly average is still higher than in the fourth quarter of 2011, because of the growth that occurred between October and December.   That’s how near-zero growth within the quarter can translate into a positive (but lacklustre) increment compared to the previous quarterly average.

Combined with intensifying global uncertainty, near-zero bond yields, and a disappointing U.S. jobs report today, it all adds up to a good reason to go out for a gloomy Friday night drink.  Currency traders seem to agree: they knocked another cent off the loonie today (it was down 6 cents in May … one silver lining to this cloud).  I think the second quarter GDP number is likely to be a bit better (the March and April employment numbers in Canada were very strong, and those people must have been hired to do something).  But on the whole it’s more evidence that this cycle is not like those we’ve seen in the past.

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