GDP: Cold Weather and Hot Real Estate

In October, Canada’s inflation-adjusted Gross Domestic Product (GDP) expanded by 0.16%, which rounds up to 0.2%. While a second consecutive month of growth is unambiguously good news, we should be concerned about the amount and type of growth.

Amount of Growth

Real GDP (in chained 2002 dollars) dropped from a peak of $1,241 billion in July 2008 to a trough of $1,183 billion in May 2009. It has now crawled back to $1,191 billion.

The Canadian economy remains in a deep hole. Annualized output is $8 billion above the trough, but $50 billion below the peak. It increased by less than $2 billion in October. At that rate, it would take two more years simply to restore pre-crisis output.

Throughout the crisis, Canada’s working age population has continued to grow and there have been at least some productivity-improving technical advances. So, simply returning to pre-crisis output will not create enough jobs for all of the Canadians who want them. While government stimulus has played a key role in pushing the economy back into growth, there is much more work to be done in creating jobs.

Type of Growth

The main drivers of Canadian growth in October were apparently cold weather and low interest rates. Statistics Canada notes that utilities were responsible for all of the growth in goods-producing industries, as a colder than usual winter in some regions boosted demand for natural gas and electricity.

Real-estate brokerages were the largest source of service-sector growth. The low-interest rates underpinning Canada’s surprisingly strong housing market can and should continue. However, there is presumably a limit to the amount of pent-up demand for housing. Furthermore, in seeking to prevent a housing bubble, the federal government may tighten its mortgage-insurance requirements.

Neither a cold winter nor a hot real-estate market is a sustainable source of economic growth. Canada has started to recover from the economic crisis, but the recovery’s foundations are tenuous.

UPDATE (December 24): Quoted by CanWest and The Toronto Star