Monday, June 30, 2008

Canadian Economy on the Rebound

Canadians should have an extra reason to celebrate Canada Day Tuesday, which will follow expected news Monday that, after two months of shrinkage and a first-quarter decline, the economy rebounded in April.

We are expecting a decent gain in real GDP in April after two months of negative economic growth, in part due to adverse winter weather which kept consumers shoveling snow rather than shopping and resulted in the first quarterly decline in five years. Wholesale and retail sales rebounded during the month, along with manufacturing shipments, supported by strong wage growth and continued employment gains.

However, any celebration, and the rebound itself, will likely be tempered by what analysts also expect will be further evidence of weak housing activity and shrinking auto production.

The spirits of Canadian auto workers won't be lifted by the news out of the U.S. on Tuesday.

It anticipates the June vehicle sales report for the U.S. -- the destination for 80 per cent of Canadian auto production -- will fall below the 14-million mark for the first time in 10 years, in part reflecting the impact of soaring gasoline prices on sales of light trucks and SUVs.

Meanwhile, other reports coming this week out of the U.S., Canada's main export market, aren't expected to give Canadians reason to cheer and will likely give Americans even less reason to celebrate their July 4 holiday on Friday.

The news includes the June employment report, coming Thursday, which we expect will show further job shedding as U.S. firms try to deal with rising fuel and borrowing costs. On the bright side, it expects, despite further job losses, the unemployment rate will ease slightly after jumping to a three-year high of 5.5% in May.

An index of manufacturing activity in the U.S. on Tuesday, meanwhile, is also expected to reveal further weakness, though that should be offset a bit by a report Thursday that is expected to show a slight rebound in non-manufacturing activity there, reflecting in part the impact of the tax-rebate economic stimulus package.

The U.S. manufacturing sector continues to struggle under the weight of sluggish domestic demand and high input costs. Despite the important offset that the export sector continues to provide to these factors, we expect the deterioration in the U.S. manufacturing sector to (have continued) in June.

With the U.S. economy continuing to struggle, we are unlikely to see any sustained upswing in Canadian economic activity in the near term.

On Friday, Statistics Canada will release a report on the state of pension plans at the end of last year, which in light of the losses on stock markets last summer and fall, will not likely do much to improve the mood of Canadian worker.

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