GDP grows as consumers drive recovery in Canada

Crédito y Caución expects, short term, further reduction on non payments in Canada. That said, not all sectors share this trend.
Analisis Credito y Caución
Madrid - 19-jul-2010

Canada's economy grew faster than expected in the first quarter of 2010, still led by domestic spending. GDP rose 6.1% year-on-year: the largest increase since the last quarter of 1999. This marks the third straight quarter of economic growth in Canada, following three consecutive quarters of contraction.

Statistics Canada reported that consumer spending on goods and services rose 1.1 % in Q1 of 2010, compared to a 1% gain in the previous quarter. Household spending on semi-durable goods increased, particularly on clothing, footwear, and accessories. Expenditure on new motor vehicles grew, but at a much slower pace than in the previous three quarters. Residential investment grew by as much as 5.4% - its fourth monthly increase in a row - while new housing construction rose 11% and renovation activity 6.3%. High prices have bolstered the construction industry and the furniture and building materials sectors.

Exports were up 2.9%, the third quarterly gain in a row following five quarters of decline, led by industrial goods and materials and auto products. Imports rose 3.4%, again lifted by industrial goods and materials and auto products, and by machinery and equipment.

In February, Canadian business and personal insolvencies, defined as bankruptcies and proposals, increased on Januarys figures: by 8.2% and 13.4% respectively. However, the year-on-year results show a definite improvement, providing convincing evidence that the recovery has taken hold in Canada. Insolvencies declined 6.7% year-on-year in February 2010. Consumer insolvencies decreased 5.7%, as consumer bankruptcies decreased 16%. Business insolvencies decreased 25.6%, as business bankruptcies decreased 27%. Business insolvencies for the 12 months to 28 February 2010 fell 11.6% compared to the 12 months to 28 February 2009. A reduction in insolvencies in agriculture, forestry, fishing and hunting, transportation and warehousing, construction, wholesale trade, and information and cultural industries contributed to this improvement.

In April 2010, the Expected Default Frequency [EDF] indicator for Canada dropped again compared to the previous month, continuing its 14 month decline, and ending 3,3 points lower than at its peak in February 2009. The Canadian median EDF is now at 1,04%.

Declining business insolvencies in Q4 of 2009 and Q1 of 2010 are an indication of improving payment cycle trends, across most commercial sectors, since mid 2008. As the overall Canadian economy improves, we also expect, for the short term, that Canadian payment defaults will continue to decrease. That said, not all industries have shared this improving trend. Most notably, the construction and transportation sectors have shown weak payment cycle statistics, with a pay when paid mentality causing collection issues throughout the supply chain.

Canadas growth forecast revised upwards by Bank of Canada

The strengthening economic outlook and high growth in Q1 of 2010 has led the Bank of Canada to revise upwards its 2010 GDP forecast - to 3.7% from its earlier 2.9%. Correspondingly, the Bank raised its forecast for core inflation to 1.9% from 1.7%. The headline inflation forecast, even excluding the temporary hit from the harmonisation of sales tax in Ontario and British Columbia, was also increased to reflect a higher profile for energy prices.

In April, the Bank of Canada further altered its policy stance, by ending the economic stimulus of its conditional commitment to low interest rates [0.25% was committed as the prevailing rate in April 2009] an indication that the need for this extraordinary policy has now passed. As had been widely speculated, the Bank raised its key interest rate in early June - the first G7 industrialised economy to do so in 2010. The rate hike, to 0.5% from 0.25%, is in response to two quarters of extraordinarily strong growth.

The Bank has signalled that further rate hikes are in the pipeline, and plans to implement a policy of steady, gradual rate increases. However, it also commented that its next move remains highly unpredictable and cautioned investors about the continuing uncertainty caused by euro zone fiscal problems and an uneven global recovery.

Spotlight on some canadian industries

During the global economic downturn of 2008/9, demand for steel reduced dramatically, resulting in oversupply and downward pressure on prices. Companies responded by reducing inventory levels. But in Q1 of 2010 demand started to return, prices firmed up and production started to increase. March 2010 production data showed double digit increases. As companies into the steel and iron subsector work to turn over older, higher priced inventory; they have put significant pressure on their suppliers by renegotiating established supply contracts to try to bring them in line with the current market reality. Despite this, Crédito y Caución has seen no increase in insolvencies. Our short-term outlook for the steel and iron subsector is fair to bright. As the global economy rebounds, the demand for steel and iron will continue to improve, which should sustain or improve recent pricing gains.

In the retail subsector, there has been little evidence of an increase in payment defaults or insolvencies. The only meaningful default data has been in the speciality retail segments [single store operations of clothing and footwear] which have probably been due to undercapitalisation since start-up.

Companies selling into this subsector should pay special attention to contractual terms of sale and ensure all agreed-on conditions are reflective of industry norms. The longer the term, the greater is the likelihood of non-payment or the occurrence of deduction/reconciliation issues. Crédito y Caución short term outlook for the retail subsector is quite bright. As long as consumer confidence is stable and the unemployment rate remains static year-on-year, retail gains should continue to be achieved. If the global economic recovery continues and interest rates remain in a manageable range [with a central rate of no more than 2.5%], the 2010 forecasted growth rate will probably be revised upward.

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