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Canada Economy Stalls as Factory Decline Offsets Housing

Even with the stalled growth in February, Canada is still on pace  to have a strong first quarter.Even with the stalled growth in February, Canada is still on pace  to have a strong first quarter.

Canada’s economy unexpectedly stalled in February as manufacturing and production in other goods producing sectors shrank during the month. The real estate sector, which expanded 0.5%, had its best one-month gain since 2015 as housing in Toronto soared.

Economists surveyed by Bloomberg predicted a 0.1% gain in February, after a 0.6% jump in January.

The recovery in goods production seen in recent months came to a halt in February, with those sectors recording a 0.3% decline in February after three straight months of gains. Manufacturers recorded a 0.6% decline in production, with the mining sector down 0.2%.

On the upside, it’s all about real estate. The runaway housing market in Toronto was a major contributor to economic activity in February, fueling a 5.3% gain in output of real estate agents and brokers.

Other sectors benefiting from the hot housing market was the finance and insurance sector as a whole, which posted a 0.7% gain. Construction was up 0.5% during the month.

Gains in real estate and finance meanwhile are fueling demand for professional services like legal services. The professional, scientific and technical services component recorded a 0.5% increase, led by a 2.9% gain in legal services.

From a year earlier, GDP is up 2.5% in February, the biggest gain since January 2015.

Canada’s housing sector, particularly in Toronto, has become both the main driver of growth and one of the biggest sources of uncertainty amid concern the gains aren’t sustainable.

Even with the stalled growth in February, Canada is still on pace to have a strong first quarter, with annualized growth estimated to be just below 4%. That would likely be the fastest in the Group of Seven.

At the same time, caution prevails. At a rate decision two weeks ago in Ottawa, Canada’s central bank revised up growth projections for 2017, but cut them for 2018 and raised questions about the sustainability of the rebound and the country’s long-term growth outlook.

Meanwhile, the Canadian economy is likely to see limited impact as a result of US duties on softwood lumber, according to National Bank of Canada.

In a research note last Tuesday, National Bank Senior Economist Krishen Rangasamy said if Canadian lumber exports to the US stopped completely, the net effect on Canada’s GDP would be half a percentage point.

The Trump administration announced Monday it would impose tariffs averaging 20% on imported Canadian lumber.

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