Ontario Second Quarter 2016 GDP Up 0.2%, 0.7% Annualized

I have meant to get around posting about Ontario's second quarter GDP growth after the Finance Ministry released the results recently. As is often the case, I haven't seen any major news outlet reporting on them, but I may have missed it.

GDP growth in the second quarter was 0.2% equivalent to 0.7% annualized, versus 0.8% in the previous two quarters. Population growth in Ontario is around 0.9% annualized, so 0.7% means that per capita GDP actually declined very slightly. The US had an increase of 0.4% and Canada a decrease of 0.4%. I'm wondering if the quarter was affected by the wildfires in Alberta.

The ministry provided this helpful image with quarterly data going back a ways (which is useful in case they revise some quarters).

I'm a little surprised at how good the previous three quarters were. The third quarter of 2015 had annualized growth of 3.6% which in this era is excellent. Considering the fiscal year starts in the second quarter, 2015-2016 was a good year for Ontario. Now with the slow start in 2016-2017, this fiscal year could be less impressive. Certainly the 2015-2016 fiscal year corresponded with the Canadian dollar tanking which was likely a strong factor for growth.

Exports were again negative in the quarter: "Exports declined 3.3% in the quarter, following a strong increase of 6.2% over the previous four quarters. The decline in exports was largely concentrated in international goods (-5.3%), with fewer exports of motor vehicles, consumer goods, and metal and non-metallic mineral products." So previous to this quarter, exports likely benefited from the weak currency. What happened this quarter I'm not sure about, although I'm guessing it was auto production related. With slowing auto sales in the US, there could be future problems for Ontario exports.

"Business investment advanced by 0.6%, adding to the 0.9% gain in the first quarter. The second quarter gain was led by a 0.9% increase in residential construction investment, reflecting strong resale activity. Business investment in machinery and equipment (+1.5%) rose, while non-residential structures (-0.8%) declined and business inventories were reduced slightly. Government current (+1.0%) and capital (+0.4%) expenditures rose in the quarter." That is good news compared to what had been going on the last few years in business investment, although the residential aspect is troubling.

"Sales of existing homes were 9.3% higher in the first eight months of 2016, compared to the same period in 2015." So what little growth there was, was influenced heavily by the real estate sector. Any pullback will cause Ontario a lot of problems.

The third quarter numbers should be interesting. The first estimate for US growth was 2.9% annualized after two weak quarters, so perhaps Ontario's exports will bounce back.



 

2015 Ontario First Quarter GDP Growth -0.2% Annualized

The Ontario government has published their first quarter GDP number in the quarterly economic accounts and the news isn't good. The economy declined by 0.1% or 0.2% on an annualized basis. That's the first negative quarter of GDP growth since the second quarter of 2011. Exports declined 2.0% which isn't good news (for GDP especially) and somewhat surprising considering the low dollar although the US also declined by 0.2% annualized in the first quarter and since most Ontario exports go to the US that probably explains some of the export decline. Imports were only off 0.2%. Curiously I haven't seen this first quarter decline reported anywhere else, but I may have missed it.

In other bad news in the report, "Capital spending on machinery and equipment declined 1.2%." That's not good for future GDP growth. Also inventories increased by $8.1 billion in the quarter after increasing by $5.8 billion in the fourth quarter. That also isn't good for future GDP growth as eventually they will need to be drawn down.

I already mentioned that the US GDP declined 0.2% in the first quarter, while Canada as whole decline 0.6% on an annualized basis. So for Ontario, performance was obviously better than for Canada as a whole, but still negative. Canada's GDP number for the second quarter should be coming out in the next few days. April's number was slightly negative, so the Canada number for a whole shouldn't be very high and one would expect Ontario's wouldn't be either (although Ontario has had decent jobs growth for May and June). The US Atlanta Fed model prediction for second quarter GDP was a much healthier 2.4% on July 27, so maybe that will help out Ontario's second quarter number.

The current budget document predicted GDP growth for 2015 for Ontario of 2.7%. With this slightly negative number in the first quarter and possibly a weak number in the second, it will be difficult to hit that. Some Canadian banks had predictions of over 3% growth in 2015 Ontario, but that clearly won't happen, as that would require growth of at least 4.5% in the last three quarters. Lower GDP growth will probably also affect government tax revenues, which could lead to a wider than anticipated deficit in 2015-2016 fiscal year.

TD Is Predicting Weak First Quarter for Canadian GDP; Surly Hamiltonian Unsurprised

There's an article from the Financial Post out, entitled "Canadian economy to ‘weather oil-price storm,’ but expect very weak first quarter: TD." In the article are some TD predictions on the 2015 Canadian economy:

"TD Economics estimates gross domestics product will grow 1.9% this year, compared to 2.5% in 2014. The first quarter of 2015 will be especially weak — at an annualized pace of just 0.5% — but each quarter will improve after that. The bank is forecasting overall GDP growth in 2016 of 2.2%."

US growth isn't looking particularly strong in the first quarter and I'm not at all surprised by TD's prediction that the first quarter GDP growth for Canada will be just 0.5%. I haven't really seen any economic indicators related to the first quarter that have been particularly good.

Obviously Alberta is sucking due to low oil prices, but Ontario isn't doing so great either (just check out the previous post here on low construction starts in Ontario in February or the mediocre employment numbers in January and February).

Amazingly there's an RBC report (warning PDF) that Ontario will have 3.3% GDP growth in 2015. And that report is from this March! Personally, I don't see it. With weak US growth in the first quarter, Ontario's likely won't be so great and it will be hard to make up the weak first quarter number to get to 3.3%.

Canadai's GDP Growth in July: Zero. What Does tt Mean to Ontario?

This National Post article has the news that Canada's GDP growth was zero in July:

"The flat reading in gross domestic product was the weakest performance since December 2013, when the economy fell by 0.4%, Statistics Canada said Tuesday. Economists had expected GDP to expand by 0.2% in July.

The economy grew by a modest 0.3% in June and by 0.5% in May. On a quarterly basis, the economy posted gains of 0.9% between January and March and 3.1% in the second three-month period. Many forecasters had been looking for growth of 3% or slightly lower in the third quarter."

What's interesting for Ontario for the first quarter is that Quebec reported a strangely high 2.3% number, while one would assume that Alberta and Saskatchewan would report higher numbers than 0.9% just based on population growth alone. Ontario hasn't reported its GDP number for the first quarter yet, but some province has to be below the 0.9% number and dragging it down. This part of the article would suggest that manufacturing and auto manufacturing isn't going to do too much for Ontario's economy in the second half of the year:

"On Tuesday, Statistics Canada said the manufacturing sector, which has struggled to gain momentum, advanced by 1% in July, supported by increases in transportation equipment, computer and electronics products. Construction, professional services and retail trade also showed slight increases during the month.

“We still have concerns about the manufacturing sector. Admittedly, production increased in July, but growth has been bolstered in recent months by a weather-related rebound in the auto sector,” said David Madani, Canadian economist for Capital Economics.

“Given the lack of investment in this large sector and increasingly intense competition from the southern U.S. and Mexico, Canadian auto production won’t be a positive force over the second half of the year.”"

This is an important issue for Ontario. Even with car sales picking up in the US, Ontario doesn't make nearly as many cars as before the recession of 2008. Ontario won't benefit as much.

With regards to GDP in the third quarter:

"In its last quarterly Monetary Policy Report, released in July, the Bank of Canada predicted a third-quarter advance in GDP of 2.3%, followed by 2.4% growth in the final quarter. The bank will publish its next MPR on Oct. 22."

That seems high to me, especially with all the events currently going on, although the Canadian dollar continuing to tank certainly should aid the Canadian and Ontario GDP numbers a bit. Note that the Ontario Finance Ministry is predicted Ontario's 2014 GDP to come in at 2.1%.

The Financial Post has this article on the August trade numbers for Canada, which adds some context for third quarter GDP predictions:

"August was expected to be another healthy month for exports — coming after a $2.2-billion surplus in the previous month. Instead, the value of goods and services delivered to global markets fell into the red by the tune of $610-million, as exports declined 2.5% and imports rose 3.9%.

Forecasters had called for a surplus of $1.6-billion in August — following the July tally, which Statistics Canada on Friday revised slightly downward from its previous estimate of $2.58-billion."

Obviously exports tanking isn't good for GDP and one has to think that the August numbers will end up hurting the third quarter GDP numbers for both Canada and Ontario. The composition of the export drop (autos) is a problem for Ontario:

"In Friday’s report, Statistics Canada said the value of exports fell by $44.2-billion in August, led by declines in shipments of vehicles and auto parts, as well as energy products. Imports, meanwhile, rose by $44.8-billion during the month."

So where do we end up for third quarter GDP for Canada and Ontario?

"However, David Madani, at Capital Economics, said “the fact that most export categories showed small declines, or flat growth, was a bit disconcerting.”

“This supports our view that, after stalling in July, GDP probably only grew modestly in August,” he said.

“This is further evidence that the consensus estimate for third-quarter growth of 3% is too high,” with Capital forecasting 2.4% annualized growth between July and September."

I'm still hoping for Ontario to release the first quarter GDP number. It would provide a lot of clarity.