GDP: Canada Gets Its Head Above Water

UPDATE (September 1): Quoted in The Toronto Star.

Canadian Gross Domestic Product (GDP) grew modestly in the second quarter, but that modest growth returned GDP to a level not seen since before the economic crisis.

Recent Developments: The Second Quarter

Canada’s output expanded at a quarterly rate of 0.5%, which corresponds to an annual rate of 2.0%. Such growth would be acceptable in normal times and is somewhat ahead of the US, which recently reported an annual rate of 1.6% for the second quarter.

However, one would hope for stronger growth coming out of a recession. The second quarter pales compared to the first quarter, in which Canada leapt forward at a 5.8% annual rate. (Today, that impressive first-quarter number was revised down from the 6.1% originally reported.)

International trade was the main drag on Canadian growth in the second quarter. A huge rise in imports withdrew far more demand from our economy than a modest rise in exports added. While both imports and exports have been recovering since mid-2009, imports seem to be accelerating while exports appear to be decelerating.

Canada’s domestic economy grew much as it had in the first quarter. Consumer spending and inventory restocking continued to be the main drivers of growth.

Government spending and investment again edged up only slightly. Stimulus spending appears to have peaked by the end of 2009.

The most striking difference from the first quarter is that business investment in machinery and equipment belatedly started to recover in the second quarter. In terms of the overall growth in business investment, a slowdown in residential structures offset the pick-up in machinery and equipment. However, it is good that corporate Canada is finally investing in productive assets instead of real estate.

The Longer View: Saved by Stimulus

Since overall GDP has returned to pre-crisis levels, now is an opportune moment to examine how the different components of GDP changed during the recession:

Canadian Gross Domestic Product ($ billions)

Â	2008Q3 Â	2010Q2Â	ChangeÂ
Total GDP  Â	$1,321  Â	$1,321 Â	$0  Â
Consumer Spending Â	$ 813 Â	$ 839 Â	$26 Â
Gov. Purchases Â	$263 Â	$280 Â	$17 Â
Gov. Investment Â	$43 Â	$55Â	$12 Â
Housing ConstructionÂ	$78 Â	$79 Â	$1 Â
Business InvestmentÂ	$203 Â	$162 Â	($41) Â
Business InventoriesÂ	$13 Â	$13 Â	$0 Â
Exports Â	$485 Â	$446 Â	($39) Â
Imports Â	($586) Â	($564) Â	$22 Â

A couple of GDP components, namely residential structures and business inventories, dropped during the recession but have now recovered to pre-recession levels. These components have simply returned to where they started.

Governments did the heavy lifting. Together, government purchases and investment increased even more than consumer spending (+$29 billion vs. +$26 billion). This contribution to the recovery was disproportionately large, given that government purchases and investment were only 38% the size of consumer spending before the recession.

Meanwhile, business investment and exports are still far below pre-recession levels. This shortfall has been offset by lower imports, higher consumer spending, and more government purchases and investment.

The public sector is the most significant offsetting factor. Without stimulus, our economy would still be under water.