Growth rate in Canada

October 2006


According to Statistics Canada the real growth rate in the GDP has slowed from 0.1 % in April to 0.1 % in May to 0 %growth in June.However in July it recovered to 0.2 %The generally slower growth reflects the impact of higher interest rates from the Bank of Canada in the preceding months and the slow down in manufacturing because of the rise in the value of the Canadian dollar and the spill over effect from slower growth in the US.More robust growth occured in the energy sector and the retail trade and financial sectors.The slow down in the American housing market has fed back into the lumber and building supplies sector and led to plant closures and cutbacks in Canada. Construction and forestry were down and manufacturing overall was flat. If the growth continues we may escape a recession.But to be on the safe side it is time for the central bank to reverse interest rate hikes.


Surplus budgets at both the Federal and Provincial levels for a total of 26.2 billion are also mildly contractionary.


If we factor in the fall in oil prices from the high of $78 to the current price of $58(as of Oct.4, 2006) and the fall in natural gas prices the previous boom in the commodity markets is now losing some steam.

This is reflected in the fairly steep correction in stock prices.The Canadian S&P fell 261 points reflecting the fall in energy commodity prices. A number of firms that do the bulk of their business in the US continue to lay off workers to adjust to the high value of the Canadian dollar.

The fall in oil prices is due to the elimination of the risk premium because of the end of the war in the Middle East and the end of the high demand summer season. At least thats what the futures market oil traders argue. One of the most important things to understand about the oil cartel is its linkage to the futures market whose trades drive the spot market price.Futures markets are notoriously driven by rumour, expectations and risk evaluation.

The profitable cost of production for Canadian tar sands oil is about $25 a barrel. Middle Eastern oil is much cheaper to produce so there is plenty of room for prices to fall further. But only if the cartel permits it.

We shall see if this initial drop in prices changes the timing of projects such as Petro-Canada's Fort Hills $19 billion oil sands project coming on stream in Alberta.

Anyway you look at it the Bank of Canada needs to reevaluate their interest rate stance.