Canada’s Economy Reaccelerates

October 8th, 2015
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Investing Daily Article of the Week

by Ari Charney, Investing Daily

Given the extent of the oil shock, it's probably too soon to say that Canada's economy is fully on the mend. But most economists had expected the country's gross domestic product (GDP) growth to reaccelerate during the latter part of the year after an atrocious first half.

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And the latest economic data certainly suggest that Canada is finding its footing again. The otherwise lackluster second quarter ended on a strong note, with June GDP up a revised 0.4% month over month, exceeding the consensus forecast by two-tenths of a percentage point.

Now that Statistics Canada has reported the latest numbers for July, we can see that the country's economy has once again surpassed economists' expectations. July GDP grew 0.3% month over month, ahead of the consensus forecast by a tenth of a percentage point.

Two consecutive months of growth is a welcome relief after five straight months of declines.

Since Canada is in the midst of the rough and tumble of an election season, there was some debate over whether the first-half contraction was a "technical" recession.

Many economists quibbled with this characterization, since the declines in GDP weren't accompanied by similar setbacks in other important parts of the economy, such as employment growth.

Regardless of what you call it, the economy's retrenchment appears to have been relatively short-lived. As BMO Capital Markets economist Benjamin Reitzes told the Financial Post, "Most definitely, this is among the shortest and most mild (recessions) in Canadian history."

Also a relief is the fact that the economy managed to produce such growth even after oil prices collapsed once more in July.

In fact, oil and gas production was one of the leading contributors to economic growth in July, up 4.4%, mainly due to a 9.1% gain in non-conventional oil production.

Part of the recovery in crude oil volumes appears to be due to a return to normal activity after production was hindered by maintenance activities and wildfires in April and May.

Economists with CIBC note that despite the drop in oil prices, industry estimates indicate that crude oil production could grow by as much as 200,000 barrels per day. With data showing just two-thirds of that threshold having been achieved, there could be more gains ahead.

Manufacturing output also grew during the month, up 0.6%, due to gains in production of transportation equipment and furniture, among other items.

We've been monitoring the manufacturing sector since the Bank of Canada sees its resurgence as key to transitioning away from the economy's dependence on spending by debt-burdened consumers.

The declining exchange rate is expected to play a big role in this shift, and the lower Canadian dollar does appear to have given export volumes a boost recently. The loonie currently trades at around USD0.75, down nearly 16% from its trailing-year high.

Meanwhile, on a year-over-year basis, important economic contributors such as real estate and finance were up 3.1% and 6.9%, respectively.

So how do economists expect the second half to shape up? The consensus forecast is for GDP to grow by an average of slightly more than 2% during the third and fourth quarters, a sharp contrast to the decline posted for the first six months of the year.

Even so, with the oil and gas sector at least partially sidelined, the Canadian economy's return to full capacity is projected to take longer than previously forecast.

The Bank of Canada estimates it would take annualized growth of at least 2.5% for the economy to be firing on all cylinders again, and it doesn't expect GDP growth to surpass that number for a full year until 2017.

Fortunately, our investment strategy of selecting companies with sound balance sheets and the ability to deliver strong dividend growth should help us weather this difficult period.

In fact, we just restored one of our Dividend Champions to a "Buy," thanks to a ramp-up in free cash flow that should sustain an enticing forward yield of 7.7%.

But only subscribers to Canadian Edge get to learn which stock that is.

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