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Canada’s Economy Growing Again but Recovery Still Fragile

February GDP data which Statistics Canada published on April 30, 2010 indicates that real GDP grew by 0.3%. This is welcome news that seems to indicate that an economic recovery is, indeed, taking hold. Yet the pace of the recovery is still fairly anemic and mired by various risk factors – so the economy is not out of woods quite yet.

According to Statistics Canada, February’s GDP growth was lead primarily by the manufacturing sector (See the full report here: ). This coincides with hiring demand trends that we saw in the first quarter of this year in Ontario’s York Region, indicating that manufacturers have been hiring at a pace that we had not seen for a while. But let’s not forget that it was the manufacturing sector that was most severely hurt by the recession – and it had dominated the job losses. So at this point, the growth experienced in February looks more like a correction due to manufacturers getting back up to speed, rather than a long-term stable recovery trend.

This is still good news: An increase in GDP and hiring demand in the manufacturing industry indicates that the ice is finally starting to melt and Canadian manufacturers are seeing stronger demand for their products. There are signs that the situation is returning to normality. Some American car manufacturers in particular seem to be starting to come back to life after spending last year on life support. General Motors, for example, announced plans to invest $890 million in 5 plants in North America – including $235 million for its St Catharines Powertrain facility – and   is re-hiring 500 to 750 workers at its Oshawa plant. The company also announced that it has repaid its loans to the governments of Canada, Ontario, and the United States in April (some newspapers quickly pointed out that GM actually re-paid its creditors with their own money). Car makers in general saw their sales increase in North America.

But is the manufacturing recovery going to last? And is it sufficient to keep the whole economy on a path to recovery?

It will help, but it is unlikely to last unless it spills over to other industries. And it is not yet clear that this is happening. As important as the manufacturing industry is to Canada’s economy, it alone does not have the horsepower to pull the economy out of the ditch. In reality, manufacturing only accounts for just about 15% of Canada’s GDP. The service-producing industries, in contrast, account for over two thirds, and overall growth there was quite slow in February. Some service industries even declined, including Wholesale Trade and Professional, Scientific, and Technical Services. To be fair though, on a year-over-year basis, the goods producing sectors actually experienced slower growth than the service producing sectors (1.8% vs. 2.6%) – so manufacturing seems to simply be catching up with trends that were further ahead in other industries. However, the fact that GDP growth in the service producing sector all but evaporated in February is a testament to the fragility of the ongoing recovery.

Another problem is that some events that occurred since February might have an unfavourable impact on manufacturing. For one, the loonie has been gaining steam against the US dollar and the Euro, thus increasing the cost of Canadian-made products on the US market and in Europe. Interest rates have also started increasing, making credit more expensive. And the public debt crisis in the Euro zone (lead by Greece, but carrying risks for all European economies) is making a recovery there less likely and might result in yet another decline in the demand for manufactured products.

Hiring demand trends recorded by Vicinity Jobs in certain Ontario regions also point to a fragile recovery. While hiring demand is up on a year-over-year basis, overall growth has been slow – and unstable. Hiring demand was up in March vs. January and February, but took a dip again in April. There are some signs pointing to a recovery as well, however: For example, at the bottom of the recession, hiring was dominated by openings for management positions and by the healthcare and retail industries. Currently, hiring demand is highest for administrative jobs – as it was before the recession began. And hiring demand from the professional, technical, and scientific services industry has surpassed hiring demand from the healthcare industry.

The future remains unclear. A recovery is clearly underway, but it will come with some restructuring of the economy. It will likely take the economy much longer to climb back up to its pre-recession heights than it took for it to sink into the recession. Yet although there are still many factors that might slow down the ongoing recovery, there is probably a good chance that the recovery is here to stay. For now…

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