Canadian recession imminent despite better-than-expected GDP

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OTTAWA, Dec 25 (Internet): Canada's gross domestic product (GDP) declined less than expected in October, but the country will slide into recession nonetheless, economists say. Real GDP slipped 0.1 per cent in October following a 0.1 per cent monthly increase in September.
The October GDP figure beat economists' consensus forecast of a 0.3 per cent decline, in large part due to an unexpected 1.2 per cent surge in oil and natural gas extraction activity and an increase in lumber and forestry output. But, economists said Wednesday the increase in output in oil and gas and forestry is unsustainable.
"If we look at what's happening in manufacturing, construction and the retail and wholesale trade - these labour intensive activities are slowing and it's sort of consistent with the view that growth has weakened fundamentally in the fourth quarter," said John Clinkard, Deutsche Bank Securities chief economist for Canada.
Oil and gas extraction declined 3.2 per cent in August and 0.9 per cent in September due to plant shutdowns, Clinkard said. The upsurge in the oil and gas sector in October was more of a "technical increase brought about by technical factors," which distorted the pattern of output, he added.
Meanwhile, services sector activity declined 0.2 per cent in October, wholesale trade fell 2.7 per cent, retail slipped 0.1 per cent, manufacturing production dropped 0.7 per cent and construction activity declined 0.3 per cent. Demand for existing houses fell so sharply that the real estate and brokers industry declined 14.3 per cent in the month.
Given that oil and gas extraction will be unlikely to offset the weakness in other parts of the economy in coming months, GDP data from November and December will be weak and should show that the Canadian economy continued to contract in the fourth quarter, Clinkard said. He added that US durable goods orders declined sharply in October, another negative factor for the Canadian economy.
"That will push through and depress (Canadian output) in November," he said.
BMO economist Benjamin Reitzes said the October GDP report likely marks the start of a recession in Canada.
"Unexpected (and unsustainable) strength in oil and gas extraction and forestry and logging offset significant weakness in manufacturing and construction, keeping goods-producing industries flat. Manufacturing is likely to continue suffering with the struggling auto industry and worsening US economy, while the construction sector should also continue to cool with a sharply slowing Canadian housing market," Reitzes wrote in a research note.
CIBC economist Krishen Rangasamy said the GDP report, while better than consensus estimates, is by no means good news.
Weakness from Canada's main engine of growth, coupled with the drag on trade by the global recession, makes an economic contraction in the final quarter all-but-certain."
Rangasamy said CIBC is expecting a "sizable" 3.5 per cent GDP decline in the fourth quarter.
HSBC economist Stewart Hall said Canada will be unable to decouple itself from the sinking economy in the US and he forecasts a 2.5-per cent annualised quarterly decline in Canadian GDP for the closing months of 2008.
TD economist Diana Petramala had a more positive take on the October GDP numbers, saying the result showed resilience in the economy. She noted only eight of the 19 industrial sectors tracked by Statistics Canada showed contractions in output. However, Petramala also said the October report likely marks the beginning of a recession.