Wednesday, June 3, 2015

Canadian First Quarter of 2015 GDP Growth Terrible, What About Ontario's?

I meant to post about Canada's GDP growth in the first quarter last week when the news came out, but I was somewhat slow. In the first quarter, GDP contracted by 0.6% (annualized) almost in line with the contraction in the US of 0.7%.

Now obviously that contraction has a lot to do with crashing oil prices. However saying that poor GDP performance is limited to Alberta would seem to be incorrect. Compared to Ontario's and Quebec's GDP, Alberta's contribution to overall GDP growth is significantly smaller. It is doubtful that Alberta's performance could be that bad and Ontario and Quebec's performance that much better with a 0.6% contraction. Probably at best Ontario posted zero growth, however considering how correlated Ontario's GDP is with US GDP, Ontario also having a negative growth first quarter is certainly possible.

Unfortunately the Ontario government won't announce the provincial GDP number for some time. However it should be remembered in the current budget document that the finance ministry is predicting 2.7% GDP growth for Ontario in 2015. If Ontario had a zero number in the first quarter, I doubt that growth will be strong enough in the remaining three quarters to get to 2.7% (even more amusingly, there's a Canadian bank predicting 3.3% GDP growth for Ontario in 2015 which was made in March!).

US growth is looking better in the second quarter of 2015, but not great (the Atlanta Fed GDPNow forecast for the second quarter is 1.1% at the time of writing). So it seems doubtful that Ontario will have a particularly strong second quarter either. If growth for 2015 is significantly below 2.7%, then tax revenues for Ontario are going to take a hit.

With Ontario's population growth around 0.9%, GDP growth per capita will likely not be much above 1% a year, about where it has been since the last recession. I don't see why that would change.

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