Staples Recovery

Gross Domestic Product (GDP) edged up 0.1% in May. Annualized output was $1,231 billion, still below the pre-crisis peak of $1,241 billion in July 2008 but well above the trough of $1,186 billion in May 2009.

Canada-US Comparison

American GDP figures released this morning indicate an annual growth rate of 2.4% in the second quarter (April – June). Over April and May, Canadian GDP grew at an annual rate of just 0.6%. Without dramatically stronger Canadian growth in June, we will have underperformed the US in the second quarter.

Sectoral Breakdown

Canada’s relatively flat total GDP masked significant changes in output between industries. The service sector contracted. An especially large drop in wholesale trade, a link between production and buyers, may confirm that the recovery is losing momentum.

The next steepest drop was in construction, likely reflecting a slowdown in the housing market without any meaningful pick up in non-residential business investment. Manufacturing was basically flat overall, with an increase in non-durable goods slightly outweighing a decrease in durable goods.

The only real growth sector was commodity production. Mining, oil and gas expanded by 3.4% in May. That figure would be quite respectable as an annual growth rate, but is incredible as a monthly growth rate. Meanwhile, forestry and logging expanded by an eye-popping 7.7%.

The staples thesis posits that Canadian economic development is driven by the extraction and export of staple commodities. Certainly, staples drove Canadian growth in May, offsetting declines in most of the rest of the economy.

Importantly, GDP figures only measure changes in the volume of output. Canada’s staples recovery is even more dramatic if one multiplies those volumes by the rebound in commodity prices since last year.