Ontario Third Quarter GDP Grows 0.9% or 3.5% Annualized, Underlying Numbers Weak

I hadn't got around to writing about the Ontario third quarter GDP growth number which at 3.6% was a very good number for today's Ontario. Though to be fair that is a single quarter. On the Ontario Finance Ministry third quarter economic accounts page, the second quarter number is now listed at 1.7% annualized, up 1.4% from when the second quarter numbers were released.

Curiously, when the second quarter numbers were released by the ministry, the first quarter number was revised up to 0% versus the chart now released for the third quarter that shows the first quarter growth as now being slightly positive (eyeballing it, I would say 0.7% annualized). The Ontario 2015-2016 budget predicted 2.7% GDP growth which could be possible with a decent fourth quarter, but I'm betting the third is a bit of an anomaly.

From the US BEA results for US GDP released on January 29, "In the third quarter, real GDP increased 2.0 percent". Statscan reported third quarter growth of 2.3%, so Ontario had significantly better performance for both.

From the economic accounts page, "Exports advanced 3.0%, the strongest quarterly gain since 2013.  Imports edged down 0.1% in the quarter." I'm wondering how that compares in terms of items and individual services versus the dollar values.

More negative is that "Capital spending on machinery and equipment decreased 0.6%, the third consecutive quarterly decline" which certainly isn't good for future productivity growth.

Inventory numbers were also negative "Non-farm inventory accumulation slowed as businesses added $1.4 billion ($2007) worth of goods to inventories, down from $5.5 billion in the second quarter.  The third quarter inventory buildup occurred in the manufacturing and retail sectors, while wholesale inventories declined" Those inventories have to be unwound some time, so when it happens, it would be pretty.

Obviously the 3.5% number for the third quarter was impressive, although digging down, one wonders if it was really just currency effects. Significant future productivity growth certainly doesn't seem like it is going to happen.

What about the fourth quarter? In the BEA January 29th first release of 2015 fourth quarter GDP for the U.S., the annualized GDP number was 0.7% annualized, which obviously isn't good and is below population growth so GDP would have declined on a per capita basis. So for Ontario, which depends on the U.S as its main export market, that's not a good sign for the fourth quarter number. I would say the numbers for the first quarter of 2016 aren't likely to be strong either, but things could change in the last two months of the quarter.

Ontario Posts 2015 Second Quarter GDP Growth of 1.4%, Revises Up First Quarter GDP to 0%, First Half GDP Per Capita Negative

Ontario posted their second quarter GDP numbers over at the Finance Ministry site. It was 0.4% or 1.4% annualized. Interestingly the first quarter GDP number has been raised to 0.0%, when originally it was -0.2% on an annualized basis, so that's a small positive. With the positive growth in the second quarter Ontario didn't meet the technical definition of a recession of two successive negative quarters.

With growth of 0% and 1.4% in the first two quarters of 2015, that works out to to approximately 0.7% GDP growth in the first half of 2015. That's obviously not that impressive and goes against the narrative that while Alberta is doing poorly, Ontario is doing well. Considering that population growth is around 0.9% annually that means that Ontario actually had a slightly negative GDP per capita in the first half of 2015. That will have implications for Ontario government tax revenues and the deficit.

The finance ministry blamed poor first quarter growth on "unusually harsh weather, supply chain disruptions from the U.S. west coast port labour dispute and retooling at some of Ontario’s auto assembly plants." At the risk of sounding like the Ontarian Zerohedge, winter is cold and snowy in the first quarter and isn't really a surprise. Blaming US west coast stevedores also seems like a bit of a reach. 

Some interesting quotes from the finance ministry on the second quarter:

"Capital spending on machinery and equipment decreased 4.9%, the third consecutive quarterly decline, while investment in non-residential construction advanced 4.1%, following a 1.5% increase in the first quarter."

"Businesses increased inventories by $5.8 billion, slowing from an accumulation of $8.4 billion in the first quarter."

"Both exports (+0.7%) and imports (+0.4%) advanced in the second quarter, rebounding from first quarter declines."

The decline in spending on machinery and equipment is depressing given its importance for productivity growth for Ontario and GDP growth per capita.  The inventories increasing is also interesting as eventually they will have to normalize. The exports increasing is good although considering the low dollar I'm not sure it is that impressive.

Compared to Canada's overall performance, GDP decreased 0.8% in the first quarter and 0.5% in the second quarter on an annualized basis. So Ontario's growth was 0.8% more than Canada's in the first quarter and 0.9% in the second quarter. In the second quarter, GDP growth in the US was a strong 3.9%, and contracted 0.2% on an annualized basis in the first quarter.

Given that the current Ontario budget document is predicting 2.7% GDP growth in 2015, that seems highly unlikely with around 0.7% growth in the first half. That would require growth of 4.7% in the second half of 2015 which I think most would agree isn't going to happen.

What's next for the third quarter? The initial estimate of the US third quarter growth is 1.5% annualized which is Ontario's largest export market. There are predictions of third quarter growth for Canada of 2.5%, so Ontario as such a large part of the Canadian economy shouldn't be too far off of that. Although oddly the third quarter jobs numbers for Ontario was quite poor, while the second quarter was actually quite good.