TD Economics

July 30, 2010

Data Release: Canadian Real GDP soft in May

• Canadian real GDP rose 0.1% in May, an improvement from April’s flat reading, but still well below the
strong gains experienced during the heydays of the recovery. And, on a three-month moving average
economic growth has decelerated from a peak of 0.5% in March, to just 0.2% in May.

• The goods producing sector helped drive growth, while services contracted for a second consecutive
month. The expansion in May was largely driven by a sharp 3.4% increase in mining, oil and gas
extraction. Outside of this industry, economic activity was weak. Wholesale trade was the weakest link
in the service sector in the month, falling by 1.8%, the sharpest decline since January 2009.

• Two major sectors of the Canadian economy – retail trade (+0.3%) and manufacturing (+0.1%) –
bounced back from a contraction in April, but were soft in the month. On a three month moving average
growth in both these sectors has cooled by a percentage point from the peak growth rates experienced
in March.

• The cooling underway in the housing market weighed on growth in the month with construction down
1.6% on weak new homebuilding and renovation activity, and finance insurance and real estate down
0.1% due to weak real estate brokerage activity. After recovering to its pre-recession level in April,
residential construction is now 3.9% below its pre-recession peak.
Key Implications
• The pace of economic growth has likely decelerated to below 3% annualized in the second quarter of
this year, almost half the growth rate experienced in the previous two quarters. A broad-based
moderation is expected to continue into the second half of this year with real GDP growth to slip into a
2.5-3.0% range

• After outperforming the U.S. in the first three months of 2010 by a large margin, the more temperate
pace of Canadian growth is consistent with soft economic activity stemming from the U.S., where Q2
economic growth was estimated at 2.4%.

• On the domestic front, the slowdown in retail trade and housing-related sectors is consistent with
headwinds faced by an over-indebted household sector, which will likely continue to put a damper on
those industries directly related to consumer spending and the housing market in the coming months.

• Notwithstanding this marked deceleration in growth, Canadian output is still expected to fully recover
from the recession by the end of 2011 – which is largely consistent with the Bank of Canada’s forecast
and with the speed of the recoveries experienced following each of the last two recessions in Canada.
Diana Petramala, Economist
416-982-6420

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