TD Economics

April 30, 2014 Data Release: Canadian economy records another solid month of growth, driven by the goods sector The Canadian economy followed through on the January rebound in real GDP (+0.5%) with a decent 0.2% increase in February. The economy grew at a 2.5% pace year-on-year in February, a slight downshift from the near 3% rate that prevailed before the economy was hit by severe winter weather in December. The gain was driven by the goods sector, which rose 0.5% in February. Within the goods sector, output in mining was up strongly (+4.8%), and oil and gas rose 0.7%, driven by stronger natural gas production. Perhaps most encouraging was the 0.6% increase in manufacturing output, which builds on a 1.6% increase in January. Within manufacturing, transportation equipment led the way (+3.4%), rebounding from twoconsecutive months of decline. Growth in the services sector was more modest, up only 0.1% in February. Interestingly many of the key categories, such as wholesale and retail trade posted gains, but the category was held back by a 5% decline in the arts & entertainment sector, as a two-weak Olympic break in the NHL held back activity in the sector.

Key Implications Canada's economy has put in two solid months of economic growth so far in the first quarter. Unfortunately, due to the hit to the economy from the severe winter storms that crippled much of the country in December, economic activity started from a depressed base. Average growth for the quarter is tracking a roughly 1.7% annualized pace, a little better than the 1.4% in our last quarterly economic forecast tracking. It is also slightly stronger than the 1.5% expectation in the Bank of Canada's latest Monetary Policy Report. Growth should improve further in the second quarter to around the 2% mark, helped by a bounce back in activity in the United States. (For a breakdown of how we expect this to play out across sectors, please see out recent Industrial Outlook report http://www.td.com/document/PDF/economics/special/CanadianIndustrialOutlook.pdf) There are already early signs supporting an improvement in Q2, including stronger hiring in March and the CFIB Business Barometer indicated that business sentiment picked up in April. Moreover, oil and gas prices are up strongly on a year-onyear basis, auguring well for activity in this key sector of the economy. Overall, growth below the economy's "potential" of roughly 2% means that a bit more slack opened up in the Canadian economy in Q1. Canada's economy has been doing better, but we expect the excess capacity in the economy will be taken up gradually over the next several quarters as Canada faces structural challenges in the U.S. market, and domestic sources of growth, like housing have slowed.

Leslie Preston, Economist 416-983-7053

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