Markets tremble to spate of disappointing Canadian, U.S. economic data

OTTAWA – Disappointing output performance in Canada and a shockingly weak jobs report in the United States is raising new doubts about the strength of the economic recovery.

Statistics Canada said Friday that the country’s gross domestic product advanced 1.9 per cent in the first three months of the year, the second sub-two performance in as many quarters and well below the Bank of Canada’s call for a 2.5 per cent start to the year.

Worse news came from south of the border, where the U.S. Labour Department posted the worst jobs number in a year, a mere 69,000 pickup in May that pushed the unemployment rate up a notch to 8.2 per cent. U.S. jobs growth has now disappointed for three consecutive months.

The bad results sunk markets both in New York and Toronto.

The S&P/TSX composite index fell 152.01 points to 11,361.2. The Canadian dollar closed down 0.6 of a cent to 96.21 cents US.

The Dow Jones industrial average plunged 274.88 points to 12,118.57, leaving the blue chip index under water for the year.

Canada’s economy depends heavily on trade with the rest of the world, particularly the United States, so the U.S. jobs number probably had a bigger impact on the dollar than did the GDP report.

Markets were already poised for a rough ride Friday after China had earlier reported that its purchasing managers index, or PMI, fell 2.9 percentage points to 50.4 in May, just above the 50 level that signifies expansion.

Analysts said Friday’s GDP report in Canada was far from positive, but also not sufficiently negative to sound the alarm.

“At the moment, a deterioration in the Canadian economy is a risk, not a reality,” said TD Bank chief economist Craig Alexander. But he cautioned that the risk antennae are up.

“The U.S. is very fragile and, from a Canadian point of view, the external environment is going to have a big impact. We are a very small open economy, the bulk of our trade is with the U.S., and we are part of a global financial system and if Europe has a major banking crisis, it will affect us.”

Scotiabank’s Derek Holt agreed, but said he was equally concerned that Canada’s domestic economy was not firing on all cylinders.

Aside from business investment and unsustainable housing construction likely pushed ahead by warn winter weather, there were very few positives going forward in Friday’s GDP report, Holt said.

Trade was a big net drag, consumer spending on goods and services, another main contributor to GDP growth in 2011, slowed to 0.2 per cent and public sector spending was a net drag. All three are likely to remain weak in the second quarter.

An additional risk is that inventories accounted for more than half the growth, suggesting that business will slow production in future months to clear out the backlog.

“The whole story about how the prime risks facing Canada had to do with events abroad is still there, in fact it’s intensified, but what’s changed is that the domestic economy is no longer looking all that rosy either,” Holt noted.

“On both fronts, the Bank of Canada has a lot of reason for caution.”

On the hopeful side of the ledger, part of the first quarter softness included a drop-off in mining output, in part due to maintenance shutdowns in the oil and gas sector that are likely to be reversed in the future.

But the below expectations 0.1 per cent advance in the last month of the quarter, March, constitutes a very weak hand-off into the April-June period.

The signs of weakness from the world’s two largest economies, added to a drawn-out debt crisis in Europe that has pushed several eurozone countries into recession, undercut the price of oil dramatically on Friday.

The price of North America’s benchmark crude oil closed down $3.30 at $83.04 a barrel in New York, adding to a 17 per cent drop in May. The main ingredient for making gasoline has declined about US$23 a barrel in price since the beginning of May, although the decline at Canadian filling stations has been less dramatic.

A average national gasoline price compiled by online price watcher was at about $1.27 a litre for regular on Friday, down from about $1.30 a month ago. As usual, local prices vary widely across the country with Edmonton at the lower end of the scale at just under $1.12 a litre and Vancouver at the higher end at $1.47.

While the Canadian economic data for the first three months of 2012 was not as dire as that from the U.S. and China, analysts noted risks were all pointing downward.

“Against this backdrop, the Bank of Canada will likely be on hold for the remainder of the year,” BMO’s Robert Kavcic wrote in a commentary.

Some economists think bank governor Mark Carney, who makes his next decision on monetary policy Tuesday, may need to keep the overnight interest rate at one per cent until at least mid-2013 and possibly longer.

Analysts note that Carney, among others, is concerned that keeping rates at super-low levels for a long period is encouraging consumers to increase household debt to unwise high levels.

But with the economy underperforming his forecast, few believe Carney will have any choice but to stay on the sidelines.