Slow 2012 for Canadian economy?
Troy Media – by ATB Financial
It started out well, then went into reverse; a strong rally in the summer, but weakness by the late fall. Canada’s economy was growing in fits and starts in 2011, and ended on a bit of a soft note.
Real GDP advanced by 1.8 per cent (annualized rated) in the fourth quarter of last year, down from a much healthier 4.2 per cent advance in Q3. It was also well below the 3.0 per cent growth posted in the U.S. in the final quarter of the year (see next page).
According to The Daily, released yesterday morning from Statistics Canada, “Both goods-producing (+0.5 per cent) and services (+0.4 per cent) industries grew in the fourth quarter. Manufacturing, retail trade, and oil and gas extraction were the main contributors to the growth. Gains also occurred in professional, scientific and technical services, the public sector (education, health services and public administration combined) and construction.”
For the year as a whole, Canada’s real GDP (i.e., adjusted for price inflation) expanded by 2.5 per cent, after an increase of 3.2 per cent in 2010.
The softer growth in the fourth quarter will provide assurance to the Bank of Canada that inflation poses little threat, and that the current accommodative monetary policy – that is, low interest rates – is appropriate.
The GDP figures reported this morning are only at the national level; province economic accounts for 2011 won’t be released until next month. However, given the strong contribution oil and gas extraction made to the national GDP, Alberta is likely to have far outpaced average provincial growth.
U.S. growth revised upward
The U.S. Commerce Department revised fourth quarter GDP growth to 3 per cent, up from the original estimate of 2.8 per cent.
This was obviously a positive surprise and was a result of better than originally reported commercial construction and consumer spending, combined with lower imports.
At 3 per cent growth, the U.S. economy was growing at its fastest pace since the first half of 2010. It’s good, but it’s not great and it’s one of the main reasons many economists (namely Fed Chairman Ben Bernanke) believe that the improving job numbers that have recently been reported might not be sustainable.
Oil sands and Bakken transportation issues
According to information from the Energy Information Administration (EIA), the depressed price that North American producers are receiving for crude oil (compared to the higher prices in Europe) isn’t as bad as the depressed price that North Dakota producers are getting.
While the price gap between West Texas Intermediate crude and international Brent crude averaged $18/bbl last month, the gap between Bakken Crude (North Dakota produced crude) and WTI hit a high of $28/bbl in early February. (It has since narrowed to $13/bbl). So, at certain times during the month, North Dakota produced crude sold at a $46/bbl discount to internationally produced crude!
Transportation bottle necks are being blamed for the divergence in price. There isn’t enough capacity getting crude from storage in Cushing, Oklahoma to the Gulf Coast, and the ramping up of production in North Dakota has eclipsed the pipeline capacity to take it out of the state. The EIA estimates that Bakken production is approaching 500/bbl a day, up from 100/bbl mid-decade.
More on crude transportation issues
With expanding oil sands production, more pipeline capacity will have to be built, but this requires getting a lot of government regulatory approval. In a recent CD Howe Commentary, Joseph Doucet, acting Dean of the U of A Business School, makes numerous recommendations as to how the process could be improved.
Dr. Doucet argues that the current process is flawed and could be improved by harmonizing the regulatory review process, instead of having different levels of government and various departments doing effectively the same work. Also, all of the connected policy goals (such as overarching social and environmental issues) should be kept out of the regulatory review process and, instead, be dealt with at the government policy level.
There are four recommendations made in the report: efforts should be made to move to a single regulator for energy policy; an overarching framework should be devised to provide clear direction; a national strategy needs to be developed to set goals and concerns; and public and private interests need to be separated during hearings.
Housing investment in Alberta
The housing market impacts the economy in a myriad of ways, including higher resale prices, higher realtor commissions, homeowners’ spending more because they feel wealthier, and impact on the consumer price index. By far the most important impact, however, is in investment spending. This is where the rubber hits the road.
New housing starts provide the largest portion of housing related investment, but the amount of money spent on renovations isn’t negligible and it can actually be more stable. When the housing market is hot, there’s a huge incentive to draw down equity to redo the kitchen; but when the resale market cools there’s also an incentive to up-grade your home instead of moving up the property ladder (if you’re in a position to do so).
Billions are spent annually on housing related investment in Alberta, and housing is the second most important source of investment spending (after the oil sands). At the height of the boom, over $2.5 billion was spent in a single quarter building homes. It’s since come down substantially, without falling off a cliff, but renovation spending has been rising, slowly and steadily, for a number of years now.
Selling oil is not enough
In economics, the current account is the sum of the balance of trade (exports minus imports), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).
Canada’s current account balance improved slightly, by $2.6 billion, in the fourth quarter of 2011. The total value of goods and services being shipped out of Canada was exceeded by the goods and services shipped into Canada by $48 billion in 2011. In short, this means Canada needed to effectively borrow the equivalent of $48 billion from the rest of the world to finance the deficit.
Thanks to crude oil, Canada has a merchandise trade surplus, but it has a severe deficit when it comes to trade in services (everything from engineering to the royalties you implicitly paid last time you saw a Hollywood movie).
Adding to the current account deficit is the fact that, over the years, foreigners have invested far more money in Canada than Canadians have invested abroad, resulting in a rather large net outflow of income in the form of profits and dividends.