Canadian Dollar Outlook: Canada's Economy Flatlines in July

10/01/2009 12:01 am EST

Focus: FOREX

GDP output held steady in July, disappointing forecasts for a 0.5% monthly increase. Rebounding manufacturing and wholesale trade were offset by slumping output in the mining sector. June's gain was unrevised at 0.1%, marking the first rise in output after ten consecutive monthly declines.

The strength in July came from durable goods output rising by 2.4% as motor vehicles and parts rebounded by a strong 17%. The end of temporary closures in the auto industry bolstered activity; however, the rise in July was much smaller than the earlier-reported manufacturing sales and suggests that the increase in production was spread into August and September. Non-durables manufacturing posted a 1% drop, which also limited the increase in overall manufacturing GDP to 0.8%.

Wholesalers saw output rise in July by 1.6%, which was also linked to the auto industry. Limiting the impact of these gains was a sharp drop in mining and oil and gas extraction, which fell 1.5% as weak demand and temporary closures weighed on activity. Overall, goods-producing companies saw their output fall by 0.4% in July as all industries except manufacturing posted monthly declines.

Service-producing industries' output rose by 0.1%. The rise in wholesale trade was supplemented by gains in the accommodation and food services industry and finance, insurance, and real estate services. Retail, public administration, and information services were weaker in July.

Despite July's disappointing result, our expectation is that the spurt in manufacturing sales will provide support to August and September GDP and will be sufficient to see Canada's economy record a modest increase in the third quarter. The July report, however, does present downside risks to our 2% forecast for the quarter.

Easier financial conditions, low interest rates, and fiscal stimulus are expected to result in an improving trend in quarterly growth in the final quarter of 2009 and into next year. In a speech last week, Governor Carney said that the economy in the "second half of this year will likely be stronger than projected in our July MPR," although he cautioned that the strengthening in the currency could provide a headwind to the expansion and "delay the return of inflation to target." Our forecast is that the Bank will maintain the overnight rate at 0.25% through the end of the second quarter of next year to ensure that the recovery builds momentum.

By the staff of RBC Financial Group 

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