Wednesday, July 20, 2016

Ontario First Quarter 2016 GDP Growth 3% (Annualized) Driven By Residential Real Estate

The Ontario Finance Ministry has released their first quarter of 2016 GDP growth numbers. It came in at 3.0 annualized, following 3.3% annualized in the last quarter of 2015. Obviously by performance over the last decade, that is pretty good for Ontario.

However where that growth came from is definitely interesting and somewhat alarming. From the ministry's website:

"Business investment advanced by 0.8%. This was led by a 2.7% gain in residential construction investment, which expanded for the fifth consecutive quarter. Stronger investment in new housing and increased home ownership transfer spending, which reflects movement in the home resale market, contributed to the gain. Business investment in non-residential structures (-1.6%) and machinery and equipment (-0.4%) declined in the quarter. First-quarter growth was also dampened by a $2.3 billion reduction in business inventories."

So residential construction is driving the bus, while less was invested in machinery and equipment, which doesn't help productivity and consequently future GDP growth. Ontario's investment in machinery and equipment hasn't been great for the last few years so eventually that's going to come home to roost.

For exports from the website:

"Exports rose by 1.7%, rising for the fourth consecutive quarter. Higher exports of automotive products and consumer goods led the first-quarter gain. The lower Canadian dollar continues to support growth in Ontario’s exports. After a modest 0.2% increase in the fourth quarter, imports advanced 1.4% in the first quarter."

Considering the Canadian dollar cratered with low oil prices in February and followed by some recovery, the second quarter export numbers and GDP numbers for Ontario should be interesting. Trade numbers from Statscan recently for April and May were not good, so one shouldn't expect good export numbers for Ontario in the second quarter of 2016. However housing still looks hot, so second quarter GDP should be OK. When housing cools down though, look out.

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