Economic Highlights of the Week

• The slowdown that emerged in the first quarter in the U.S. has many wondering what it might mean for the Canadian economy.
• Despite the Canada real GDP contraction in February (0.2% M/M) released this morning, we anticipate that Q1 growth will come in close to our earlier expectations. However, downside risk now permeates our previous Q2 call of 3.5% (annualized) growth.
• News that monetary stimulus will continue in the U.S. helps supports a Canadian dollar above parity. Most commodity prices based in U.S. dollars including gold, copper and crude oil also recorded gains from the week’s start.

United States
• The U.S economy grew at a 1.8% annualized pace during the first quarter. While the headline figure was dragged down by broad declines in government spending and real estate construction, the details were encouraging with healthy gains in consumer spending and business investment.
• The Federal Reserve met this week to discuss monetary policy. There were no major changes from the FOMC, but Chairman Bernanke did reiterate the Fed’s unwavering commitment to maintaining price stability.
• Equities continued to move higher, and the S&P500 is now approaching a 3-year high.
• The risks and rewards of ultra-accommodative policy will start changing in the quarters ahead, an inevitability investors must consider when making portfolio decisions.

What the U.S. Q1 Pause Could Mean For Canada
The saying on the street is that when the U.S. sneezes, Canada catches a cold. The inter-connectedness between the economies is not surprising though given the degree of trade linkages. With the temporary slowdown revealed in advance Q1 numbers stateside this week, Canadians cannot help but think what this development will mean for their economic outlook. In order to complete this assessment, we simply have to put the numbers in perspective, while concentrating on the high-level picture.

In a speech Wednesday, U.S. Federal Reserve Chairman Ben Bernanke forecast that Q1 economic growth would come in below earlier expectations. The reasons blamed were temporary in nature including severe weather patterns, firm crude oil prices, a sharp decline in national defense spending, and the March natural disaster in Japan. The forewarning became reality in yesterday’s advance estimates that showed that first quarter growth came in at 1.8% (an¬nualized). Even with this soft patch, the continued injection of monetary stimulus and ameliorated March numbers seen so far suggest that Q2 growth will post a solid bounce-back.

In response to the Bernanke speech and the U.S. growth numbers, the Canadian dollar continues to remain firmly above parity. Not even the election climaxing next week and the uncertainty attached to such an event has clipped the loonie’s wings. In fact, the Canadian dollar reached a three-year high (US$1.056) against the greenback this week and has stayed close to that level. The weakness of the U.S. dollar has also boosted commodity prices, including gold which closed Thursday at a record high of US$1,536.20 per ounce. This represented the third consecutive day of record numbers. Both copper (about US$420 per pound) and crude oil (about US$113 per barrel) also recorded gains since the week’s start.
The transitory nature of the U.S. slowdown is not likely to derail Canada’s expansion, but it does reinforce the notion that growth on this side of the border will be subdued over the near-term. Indeed, data on GDP for February released this morning showed a small 0.2% M/M contraction consis¬tent with the U.S. soft patch and the high Canadian dollar. Weaker international trade sectors, including manufactur¬ing (-1.6%) and wholesale trade (-1.0%) underpinned the decline. Put in context though, February’s pause comes at the heels of a strong December and January showing. The first quarter performance is consistent with our recently published forecast of 3.8% (annualized). Looking ahead to Q2, however, downside risk now permeates our 3.5% growth forecast included in our March Quarterly Economic Forecast. We will have to wait and see how March unfolds, particularly on the trade front, to get a clearer sense of the tracking.

The month-to-month gyrations in economic indicators can often leave investors and markets suffering from tunnel vision. For this reason, we find it useful to step back and note that 2011 is unfolding largely as expected; a relatively strong first half should contrast with a weaker second half. This is because it is the latter part of the year when inter¬est rate hikes will start to take effect and governments and households begin to repair their balance sheets. All told, the growth composition of 2011 has changed slightly, but the annual profile is largely the same.

Sonya Gulati, Economist, 416-982-8063

Courtesy of:
Marna Dueck
Mobile Mortgage Specialist
TD Canada Trust
Cell:  604 725 0284 or 780 918 3219
Pager:  1 866 767 5446
Fax:  604 541 0224

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