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• Data releases this week have suggested a downgrade to our estimate for Q2 GDP growth in the U.S. from
3.6% to the range of 2.0-2.5%.
• This decline in our estimate is primarily driven by much stronger import growth than previously anticipated,
and an earlier than expected slowdown in consumer spending.
• That said, it appears domestic demand growth will still accelerate in Q2 as businesses continued to invest
heavily in new capital equipment.
• Core consumer prices surpassed market expectations and grew by 0.2% M/M during June, keeping the annual
growth rate steady at 0.9%. All and all, expect markets to remain wary of the potential for future deflationary
pressures.
• Canada’s trade deficit widened to $500 million in May. Although trumped by a 4.2% real import advance,
exports volumes still rose a robust 3.9% M/M.
• Canadian manufacturing shipments gained by a respectable pace of 0.4% M/M in May. Although inventories
contracted on the month, draw-down pressures have largely abated, and new and unfilled order both rose.
• The Bank of Canada’s Business Outlook Survey for Q2/2010 revealed that businesses remain optimistic and
more firms are reaching capacity. However, fewer businesses plan to invest than in the previous quarter.
• Canadian housing data for June showed that cooling is underway, with a 8.2% M/M tumble in sales and a
2.5% M/M decline in the seasonally-adjusted average price.
advance by above 3% Q/Q annualized, but has also under- Q/Q % Chg. Annualized Q/Q % Chg.
8% 2.0%
scored the challenges facing Canada’s economy as it recov-
6% 1.5%
ers. The next quarters will feature a delicate hand-off from
households to firms as the torchbearers of recovery, and the 4% 1.0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
debt ease to rates in line with growth in personal incomes.
Source: Statistics Canada
In the face of a shaky trade balance, greater investment by * Smoothed with 5-month moving average
firms is needed to prop up domestic demand and improve
Canada’s business sector productivity. sovereign debt and uncertainties about the global recovery.
In data this week, Canada’s international trade balance Concurrently, Canadian housing is rapidly cooling. June
deteriorated in May but the report’s details were more data showed a decline in sales of 13.3% in Q2/2010, and a
positive. Exports posted a very robust real gain of 3.9%, fall of 0.7% in the seasonally-adjusted monthly quarterly
strongly driven by automotive products, but were outshone average price. Given over-pricing of Canadian housing, we
by imports, which rose 4.2% in real terms, boosted by office expect prices to slide during the remainder of 2010, retrac-
equipment, consumer goods and industrial materials. This ing to pre-recession levels. While the structure of Canada’s
presages a continuing contribution from second quarter retail mortgage markets makes housing resilient to the sort of crash
spending, and the boost to machinery and equipment (M&E) experienced stateside, moderation in housing markets points
imports bodes positively for a hoped-for investment pick-up. to slower homebuilding and slower consumption growth.
Manufacturing shipments, which are strongly driven by Again, it will be increasingly up to Canadian businesses
exports, performed respectably in May, gaining by 0.4% to boost activity. Providing insight into firm sentiment, the
M/M in real terms. Gains in shipments of motor vehicles Bank of Canada’s Business Outlook Survey for Q2/2010
and M&E goods were partially offset by declines in petro- showed general optimism that Canada’s recovery will
leum product sales. Forward-looking indicators for demand continue, but did underscore businesses’ uncertainty with
were also positive, with new and unfilled orders increasing fewer firms anticipating future sales growth. Somewhat
in key durables goods industries. However, the pace of worryingly, there was only a 12% balance of opinion towards
manufacturing is slowing after an initial surge of recovery. planning machinery and equipment investments, compared
As well, the smoothed composite leading indicator for with 22% in the previous quarter.
June, released at the week’s end, continued to grow at a Looking forward to next week’s interest rate decision
robust pace. The smoothed indicator correlates well with by the Bank of Canada, the near-term pace of rebound and
quarterly growth in GDP and also points to a strong if continuing uptake of slack point to the careful removal
slowing pace of growth in the second quarter. Nonetheless, of some of the still-exceptional monetary stimulus. Core
while most underlying components gained when smoothed price growth is still riding near target and, with indicators
with the 5-month moving average, the most recent data of capacity improving, the Bank will almost surely lift the
for the unsmoothed components were less impressive and overnight rate by another 25 basis points to 0.75% while
point to an ebbing pace of recovery in the months to come. underscoring the economic uncertainties in its communiqué,
In particular, Canadian equity markets have been volatile leaving an open door to a pause on rate hikes if conditions
in recent months, with the TSX falling by 7.5% from the warrant.
end of April to the end of June, buffeted by concerns about
Grant Bishop, Economist, 416-982-8063
The Weekly Bottom Line TD Economics
July 16, 2010 4
www.td.com/economics
Bank of Canada Interest Rate Decision* BANK OF CANADA OVERNIGHT TARGET RATE
Release Date: July 20/10
%
Current Rate: 0.50% 7
TD Forecast: 0.75% 6
Consensus: 0.75%
5
We expect that the Bank of Canada will stay true to its
newly established strategy of combining a 25 basis point rate 4
*Forecast by TDSI, Currency and Fixed Income Research. For further information, contact TDSecurities.EconomicswStrategy@
tdsecurities.com.
The Weekly Bottom Line TD Economics
July 16, 2010 5
www.td.com/economics
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