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Summer 2018 Edition No11Vol1

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Canada:GDP

April economy has manufactures a surprise gain

GDP posts a small, but surprising gain in April; Manufacturing and utilities were the sources of the upside surprise; Despite the gain, yearly GDP growth fell again, as the economy continues to lose momentum - by David Watt Chief Economist, HSBC Canada

The economy grew by 0.1% month-on-month in April. This was an upside surprise to the consensus expectation of a flat reading. The goods sector was the source of the upside surprise, specifically manufacturing, and utilities. Manufacturing output rose by 0.8%. Meanwhile, utilities output rose by 1.6%, largely due to a jump in electric power output owing to unseasonably cold weather across the country.

The news was not as positive in other goods producing industries, with declines in mining and oil and gas, construction (weighed down by residential construction), and agriculture.

Services sector output was flat with declines in retail sales, and arts and entertainment offset by gains in professional services, real estate, health care, and other services.

Inclement weather was a factor in the increase in utilities output, the drop in retail sales, and the drop in residential construction. These changes are likely to be partially reversed in May.

Implications

From a year ago, GDP has grown by 2.5%. This is down from 2.9% in March. As a result, even though there was an upside surprise in the month, the April GDP report reinforces other evidence showing that the economy has lost some momentum through 2018. This is not a surprise. In its April Monetary Policy Report, the Bank of Canada forecast GDP growth slowing to 2.0% in 2018 from 3.0% in 2017.

The April GDP report provides little reason to think that GDP growth is slowing more, or less, sharply than the Bank projects. That said, in coming months, GDP growth will be distorted by a recent power outage that has shut down production at a large oil facility. As a result, we will pay particularly close attention to the output of non-resource industries, which makes up 83% of GDP, but is more stable than headline GDP. As shown in Figure 1, non-resource output growth has slowed to a 2.0% year-on-year rate from around 3.0% through much of 2017.

As well, we are going to watch the performance of manufacturing. Despite the gain in factory sector output in April, orders don't seem to be rising as quickly. There are two points to make here. The first is that there is a notable discrepancy between GDP manufacturing and the preliminary manufacturing sales report that showed a 1.9% drop in real sales. The divergence alludes to a lack of clarity over the underlying momentum in the factory sector. Second, Statistics Canada reported that the increase in manufacturing output was accompanied by an increase in inventories in April. Thus, the real inventory-to-sales ratio rose to its highest level in nine years. Overall, the evidence raises questions about the underlying momentum in the manufacturing sector. This is not a reason to be worried about manufacturing, but it should lead to a more cautious interpretation of the reported gain in factory sector output.




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ISSN 0824-45
Copyright, 2018

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