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.

Canada 2015 Second Quarter GDP Down 0.5% (Annualized), Predictions for Ontario? Recession Possible?

Statscan just released the second quarter GDP numbers for Canada and they aren't good. Second quarter GDP was down 0.5% on an annualized basis, which follows a decrease of 0.8% in the first quarter of 2015. Interestingly that was a revision from 0.6% in the first quarter. US GDP was up 3.7% in the second quarter (although that was after a weak first quarter and the strength might be from inventory shenanigans).

What does this mean for Ontario's GDP? We won't know for a while, but we have some numbers. First quarter GDP for Ontario was down 0.2% on an annualized basis in the first quarter (although that might have been based on the earlier unrevised numbers). Considering the size of the Ontario economy as a percentage of Canada's and what happened in the first quarter, it would be hard for the second quarter number to be very high. No doubt Alberta had a far worse number than 0.5%, but Ontario's can't be much above zero. Conceivably Ontario could have -0.1% (annualized) growth in the second quarter which would match the technical definition of a recession (two consecutive quarters of negative growth). That's a pretty mild recession.

However, the Ontario 2015-2016 budget was predicting 2.7% growth in 2015 and given this Canadian number today for the second quarter, that seems impossible to meet now and there will likely be a significant miss. That will affect government revenues which potentially could lead to a bigger deficit than was planned for this fiscal year. Then again the Liberals likely overstated the deficit, so it could come in right on the number they gave. In any case, the Ontario economy isn't strong at all, despite the cratering dollar.

Atlanta Fed GDPNow Model Starts Off Predicting US 2015 Third Quarter GDP at 1.0%, Implications for Canada and Ontario 2015 Third Quarter GDP

The Atlanta Fed's GDPNow model for predicting US GDP just made their first prediction for US third quarter GDP on August 6th. Interestingly they predicted only growth of 1.0% versus consensus of 3.0%. Their reason inventories:

"The model projects that lower inventory investment will subtract 1.7 percentage points from third quarter real GDP growth. Real GDP grew 2.3 percent in the second quarter according to the advance estimate from the U.S. Bureau of Economic Analysis."

Inventories and GDP is a funny thing, so who knows what will happen. But in the first quarter when everyone was predicting decent growth for the US, the Atlanta Fed model was predicting very weak performance, which turned out to be true.

What's that mean for Canada? Many commentators are predicting much higher growth in the third and fourth quarters for Canada after possibly two negative quarters for the first half. That's likely predicated on stronger US GDP as well. If the US does in fact only grow by 1.0% that's not going to be good for Canadian GDP, weak dollar or not. For Ontario especially, which depends on the US for exports, that's not good either. Ontario had GDP growth of -0.2% annualized in the first quarter of 2015 and the second quarter isn't looking so great either. If US growth is weak in the third quarter, Ontario's full year GDP will likely be terrible and way off the Ontario budget's prediction of 2.7% for 2015. 

July's job numbers for Canada wasn't remarkable either at 6K and change, which doesn't bode well for strong growth in the third quarter either.

Ontario 2015-2016 Budget Predicts 2015 GDP Growth of 2.7%, Will We Reach It?

I just wanted to highlight the Ontario Finance ministry's prediction for Ontario's GDP growth for 2015 contained in the 2015-2016 budget PDF, on page 233. For 2015 the prediction is 2.7% (annualized) followed by 2.2% for 2016, 2017 and 2018.

Considering that the first estimate of US GDP growth just came out this week at a very weak 0.2% and the fact that Ontario and US GDP growth are quite correlated, and that the Atlanta Fed GDPNow model for US GDP growth is predicting US growth of only 0.8% in the second quarter of 2015 as of May 1st, I'm going to go out on a very thick limb and predict that Ontario won't reach GDP growth of 2.7% in 2015. The Atlanta Fed GDPNow model was dead on for its prediction of first quarter growth so I'm inclined to go with their prediction.

If Ontario also has GDP growth of 0.2% in the first quarter, growth would have to average 3.5% in the other three quarters which seems unlikely. Incredibly, there's a RBC prediction of Ontario GDP growth of 3.3% made in March, which now seems incredibly unlikely.

If the AtlantaFed model is correct for US second quarter GDP growth at 0.8% and Ontario's is similar, that would require third and fourth quarter growth of an average of 4.9% which again seems unlikely. So be prepared for revisions for the Ontario's GDP growth in 2015 and following that, less than predicted revenues to the Ontario government. On page 265 of the budget PDF, Ontario is predicting revenue of $124.4 billion in 2015-2016.

Ontario 2015 Fourth Quarter GDP Out, 2.5%, Full Year 2014 2.2%

With the 2015-2016 Ontario budget being released, the Ontario finance ministry got around to releasing the fourth quarter of 2014 GDP data on their quarterly accounts site.

The fourth quarter GDP growth number was 0.6% or 2.5% annualized. 2.5% is a relatively strong number given Ontario's GDP numbers since the Mike Harris hay days, although it was down sharply from the second and third quarter numbers which were 3.2% and 4.0% respectively annualized. Note that Canada's fourth quarter GDP number was 2.4% annualized, which is almost the same as Ontario's. The US GDP number was slightly less at 2.2%.

However first quarter growth was only 0.6% annualized, which dragged down the full 2014  Ontario GDP number reported in the quarterly accounts which was only 2.2%. The accounts page helpfully points out this is the strongest annual growth since 2010 (in 2013 GDP growth was only 1.3%) . I'll point out that the most recent provincial population growth rate was 0.9% annually, so for 2.2% a big portion of that was from population growth rather than productivity growth.

Some noteworthy tidbits from the quarterly accounts report and my comments:

"Capital spending on machinery and equipment rose 0.7% in 2014, after declining in the previous two years" - well that's obviously better than negative, but isn't great news for Ontario's productivity.

"Investment in intellectual property products was down 2.1% in 2014, following a 3.4% decrease in 2013." - this isn't particularly good for productivity either.

"Household disposable income rose 3.2%, after increasing 2.7% in 2013.  Ontario’s household savings rate declined to 3.2% from 4.6% in 2013." - that's pretty good growth for disposable income, but the fact that Ontario's savings rate went down from last year to truly sad levels I think is a testament to the low growth housing bubble Ontario finds itself in.

"Businesses added $5.4 billion ($2007) to non-farm inventories in the fourth quarter of 2014, after accumulating $1.7 billion worth of stocks in the third quarter." - that doesn't bode well for first quarter GDP growth if there's a lot of inventories to draw down on.

"Exports rose 0.4% in the fourth quarter, following a strong 3.0% advance in the third quarter. Imports expanded 1.5%, after increasing 1.0% in the third quarter." - one would think with the low dollar that exports will be more impressive. If car manufacturing in Ontario is lower in the first quarter of 2015 due to retooling and shutdowns, that isn't going to be good for exports and GDP.

The Ontario first quarter GDP number should be interesting. The US number looks to be weak, similar to the first quarter of 2014 (when Ontario's was also weak). I think there's a pretty good assumption that the first quarter of Ontario will have weak numbers, but now the main question is if the second quarter is going to be weak too.

US Revises 2014 Fourth Quarter Growth Down, Not Great For Ontario

Fourth quarter GDP in the US was revised down to 2.2% after a strong 5.0% number in the third quarter. Evidently the US economy isn't as strong as some had predicted.

What's that mean for Ontario? Now 2.2% isn't terrible, but there seems to be a media and Ontario provincial government narrative (see Toronto Star columnist Martin Regg Cohn for both) that strong US growth will propel Ontario's GDP growth to impressive levels.

With Ontario's manufacturing sector cratering, the thesis that strong US growth will spill over into Ontario makes less and less sense. And if US growth isn't that fantastic, that further undercuts the thesis that great growth is just around the corner in Ontario.

To be fair, the dollar dropping likely will have Ontario consumers switching from foreign tourism and the like and switching to instead buying goods and services in Ontario. That will give a boost to provincial GDP.

US GDP Second Quarter 2014 Growth 4%

First estimates of US second quarter GDP came in today at 4%, above expectations and considerably above the first quarter. That is good news for Ontario, however based on performance the last few years, I don't think Ontario profits as much from strong US growth as we used to. We just don't make the cars we used to ten or fifteen years ago.

Anyways, Canadian second quarter growth should be interesting, whenever it comes out.