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Canadian economy stalls in July, putting in doubt hopes of stronger rebound

OTTAWA - The Canadian economic recovery ran into a wall in July, stunning expectations and creating new doubts about just how long it will take for production and jobs to rebound to pre-recession levels.

OTTAWA - The Canadian economic recovery ran into a wall in July, stunning expectations and creating new doubts about just how long it will take for production and jobs to rebound to pre-recession levels.

Following a 0.1 per cent increase in economic growth in June that signalled the end of the recession, economists had been expecting a strong rebound in July of anywhere from 0.5 to 0.7 per cent.

And many of the early indicators were pointing in that direction, particularly the outsized 5.5 per cent pop in manufacturing sales the agency has previously reported.

Instead, the economy delivered a goose egg - zero growth.

"Okay, this is a shocker. We're not talking about a shot across the bow of the optimists, this is more like a torpedo through the hull," said economist Douglas Porter of BMO Capital Markets.

And it will send economists and policy-makers scurrying back to the drawing board, Porter added, trying to figure out not only what went wrong with their computer projections, but also what the economy will do going forward.

One scenario now clearly in play is that Canada will undergo a period of very slow growth, what analysts refer to as an L-shaped recovery.

"The figures provide a sobering reminder that the technical end of a recession may not imply a rapid recovery," said labour economist Erin Weir of the United Steelworkers union, and that is bad news for workers.

"Whatever path output takes, the labour market will be even slower to recover," because businesses will resort to ramping up work hours of existing employees and taking advantage of productivity gains before resorting to rehiring.

That is an unwelcome development for the Stephen Harper government that has been buoyed in recent weeks by growing optimism over brightening economic and job prospects.

Not all analysts were prepared to issue a mea culpa, however.

Merrill Lynch chief economist Sheryl King said that although the July number would impact her outsized four per cent growth forecast for the third quarter, she believes August and September will show better results.

King added that the longer term also remains promising.

In part, she said, the July number was hammered by temporary factors such the municipal strike in Toronto and work stoppages in the mining sector.

It was also the coldest July in 14 years, something that kept air conditioners in shut-down mode, affecting utilities. "I'm not going to change my long-term forecast based on the weather," she said."

But CIBC chief economist Avery Shenfeld said it will cause economists to downgrade their forecasts for the second half of 2009 and possibly 2010. He said it may also cause the Bank of Canada to keep its policy interest rate at its current record low rate throughout next year.

Two weeks ago, the central bank prompted speculation it might move off its easing track earlier than its July 2010 conditional commitment by announcing the economy was bouncing back faster than earlier believed.

On Monday, Bank of Canada governor Mark Carney was so sure of his forecast that he boasted in a Victoria speech about having been a lonely voice in the spring in predicting that policy measures would spur growth later this year, particularly so in Canada, "expectations (that) are beginning to be fulfilled."

But if Statistics Canada is right about July, even the central bank's original 1.3-per-cent target for the current quarter - July, August and September - is now in jeopardy.

In a report full of surprises, the biggest shocker may have been that the big increase in manufacturing sales in July was not matched by production. With time to make up after nine monthly declines, the manufacturing sector advanced only 0.8 per cent in July.

There were also surprising declines in the mining sector, utilities, construction, retail trade and municipal public administration.

On the positive side, services were up, but a disappointing 0.1 per cent overall, led by wholesale trade and a 0.2 per cent rise in finance, insurance and real estate.

Confusing the picture even further, Statistics Canada said total non-farm payroll employment rose by 74,300 in July, when its earlier labour data had indicated an overall 45,000 jobs decline in the month. The two surveys don't always agree, but it is unusual to have such a wide disparity, said economists.

 
 
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