...against fictions and other tall tales

Friday, 1 June 2012

Canada: Government deficit shrinks, Household sector deficit soars

Canada's first quarter 2012 National Income and Expenditure Accounts were released today.  Here's a brief summary, courtesy of Statistics Canada:
Real gross domestic product (GDP) rose 0.5% in the first quarter, the same pace as in the previous quarter. Business investment contributed the most to first-quarter GDP growth. Final domestic demand grew 0.3%. On a monthly basis, real GDP by industry edged up 0.1% in March.

As was the case throughout 2011, business investment continued to fuel growth. Business investment in plant and equipment advanced 1.2%, the ninth consecutive quarterly increase. Housing investment expanded 2.9%, well above the previous quarter's pace of 0.8%. Non-farm business inventories increased in the first quarter.

Consumer spending on goods and services, another main contributor to GDP growth in 2011, slowed to 0.2% in the first quarter of 2012, after a 0.7% gain in the previous quarter.

In the first quarter, final domestic demand advanced 0.3%. Growth in final domestic demand has been slowing since the first quarter of 2011. Average quarterly growth in final domestic demand was 0.5% in 2011, following 1.1% in 2010.

While exports have been increasing since the second quarter of 2011, they remain below the level reached in the third quarter of 2008. Exports grew 0.6% in the first quarter of 2012, after gaining 1.7% in the previous quarter.

Imports rose 1.1% in the first quarter, almost double the pace of the fourth quarter of 2011.
Growth of real gross domestic product and final domestic demand, Source: Statistics Canada

Two things. First, although the increase in employment in March and April will surely boost consumer spending in Q2, it's very unlikely that the economy will improve markedly for the remainder of the year.  The current slowdown in the US economy and weak European prospects will likely weigh down on both exports and business investment. Second, additional government cutbacks will continue to remove much needed demand from the economy, weakening both employment and growth.

Finally, one important piece of information that the statistical agency isn't highlighting in its summary is the massive increase in the household sector deficit during the first quarter.  According to today's figures, the household financial deficit (i.e., net borrowing or difference between quarterly sectoral spending minus revenue) increased by over $7B during Q1 ($42.5 to $49.4 B).  This is the highest level since the third quarter of 2008.  As for the public sector financial deficit, it has narrowed by approximately $9B ($66.6 to $55.1 B).

Source: Statistics Canada
In a previous post, I explained that the inverse relationship between the government sectoral balance and household sectoral balance is evidence that the goal of public sector deficit reduction is incompatible with the objective of eliminating the household sector financial deficit, one of the key priorities of the Governor of the Bank of Canada, Mark Carney.  More on this theme in my next post.


  1. !! good insights circuit. unless aggregate demand moves quickly and substantially, the business investment may turn out to be a major writeoff. i have little hope that employment will stir demand on the consumer front and as you nuance, exports are not compensating the lack of domestic demand to justify the capital invested unless it's replacement. details will show the value. moreover, i surmise that households are becoming very wary of their debt loads and the servicing accompanying the holding.

    however, i hesitate to conclude that Mr. Carney is overly concerned about household debt. i surmise that he is very concerned about the strength of the loonie, and the drastic slowdown in emerging market demand. leaving Canada on a resource grounded trade podium is not at all wise. the sliding price of oil usually precedes a quicker slide of domestic metals. there goes our trade balance as revenues plummet with no downside buffer.

    nicely done.

    @GC...lol...i welcome the question marks. i assume that you didn't welcome the interpretation Allan Meltzer gave to the Fed's initiatives during the years. in the end, it is all a matter of stresses. the Fed saw policy based on innovative insights and Meltzer opined in favor of non-insightful, although daring and courageous policy initiatives. i think fed operatives were grasping and dealing with an insidious phenomenon that had never been properly confronted. i also think, like your ??? that he could have been more generous towards the inspired Fed operatives during the Volcker decade.

    i was also disappointed in the lack of place relating to the emerging role that the Fed had on foreign CB's especially the DBundesbank and BoJ, establishing the critical influence of the FR over the entire monetary system, something unseen and seemingly unexpected, and the more subtle emergent role on the domestic scene that would eventually under PV, supercede fiscal policy.

    i concur that Vol I, and Vol II, Bk 1 are 'somewhat' definitive...but BK II ???

  2. Joseph Laliberté2 June 2012 at 07:55

    excelllent post Circuit,
    Some are delighted by the shrInking federal government deficit, I see this as a flashing red light (to the extent that it is symptomatic of an increase in the household sector deficit). I would be curious to know the share of business investment that is linked, directly or indirectly, to commodity prices.

    Cuts in "high spending multiplier" public jobs will bit some for the rest of the year, add to the mix Europe, a slowdown in China, austerity in the US, and the light at the end of the tunnels that so many see in Canada might be an incoming train.

    In the mean time, the yield on the Canadian 30-year bond is at 2.2%. In a sense, the market is begging for more fiscal stimulus.

  3. JH, you got it. I couldn't have summed up the implications on trade any better. In fact, the metals weren't even in my radar! Although I'm (still) bullish about business investment (optimist, I am...), I reckon this will likely occur only if domestic demand is sustained. And with government cutting back in earnest, the scenario looks bleaker still. Too bad about the punditry about the CAD right now (Mulcair's lighting rod...), as it surely impedes potential action by the BoC.

    Thanks JL, I'd like to see the details as well re the source of business investment. I gather your instinct are right. As for the yield on long-term bonds, there is NO better argument right now in favor of additional, massive government spending than to advertise that yield. In your opinion, what options are there to address the CAD? Are deficits the solution? I'd say it would be better than what we have now. As you say, the markets seem to call for it!

  4. @JH I take you've prioritized the loonie (!!) over the household sector, and not abandonned the latter as a concern for BoC. If so, I concur. What makes the Canadian scene more complex is that in spite of an underlying concern for unemployment increases, there is really no buffer in manufacturing to engage an increase in spending through fiscal measures as JL advocates (nod!). Manufacturing output is up but so are the imports increasing at and alarming rate.

    Heaven knows we can repair infrastructure, but no country can remain an island for long and not expect long dates yields to move adversely. I think one needs to meddle monetary and some fiscal stimulus to engage the speculative portion of the market to take a sustainable stand, and trust fiscal policy to deliver jobs until external demand reconciles the shortcomings.

  5. KP: JL also explained in the past that there may be an indirect 'fiscal channel' through which to address the CAD. I find this route quite interesting:

    "Although no channel is a magic bullet to promote exports, I think the best indirect approach remains the fiscal channel (which is obviously not under the purview of the BoC). Targetted infrastructure investments to enhance competitivness and productivity would help...

    Moreover, higher fiscal deficit could weaken the currency through a volume effect(more Canadian debt in circulation means more deposits denominated in Canadian dollars in circulation) if foreigners loose appetite to sit on their Canadian dollar holdings. That is, if foreigners desire to save in Canadian dollars decrease"

    Of course, accumulating forex reserves is another option. But this route has its downsides.

    JH, GC et al: Just off the press -- a review of Meltzer's Vol 2 by Edward Nelson.