Statistics Canada reported June 30 that Canada rebounded from negative GDP growth in the first quarter, posting a 0.4 percent increase for April. Canada’s first quarter GDP number was the worst among the Group of Seven (G7), trailing the US, the UK, Europe and Japan.

Real GDP growth slid into negative territory during the first quarter after expanding at an annualized 0.8 percent during the fourth quarter and 2.3 percent during the third quarter of 2007.

Things are still sluggish up north, confirming that, though it’s more immune than it was during the 1970s, ’80s and ’90s to a US slowdown, Canada is tightly tied to its most important trading partner.

But the numbers for April bode well for the rest of the second quarter and suggest Canada will avoid falling into “two consecutive quarters of negative GDP growth,” the oft-cited, oversimplified definition of a recession.

Here’s another reason why that definition is deficient. The mainstream press is touting the April number as a signal that overall second quarter growth remained positive. We’ll see when the numbers come in.

But the factors–perhaps the factor–that made for a positive integer seem transitory. Canada’s weakening manufacturing sector drove the positive number; it surged 1.9 percent in April. But production at one Canada-based auto manufacturing facility increased because it was thrown in the game to replace striking workers at a US plant. That labor problem has been solved, and many companies have already announced permanent and temporary plant shutdowns.

So we get a one-off, positive, short-term impact on GDP. The long-term trend–the decline of Canadian manufacturing–is flying in the same corridor as what’s become a longer, deeper, US-led global contraction.

On the other hand, April’s manufacturing strength was tempered by weakness in mining, energy and construction. Although oil and gas extraction volumes were down, the value of the resources being extracted is up. And that contributes to increases in Canadian jobs and incomes, which, in turn, support domestic demand and Canada’s retail sector. It’s a net benefit to the economy that doesn’t register if you scan the row that says “energy” in the April StatsCan report.

The Long Story, Short

Part of the story is a long-term diversification away from manufacturing; Canada’s shift trails by several years a similar global-market-forces-driven shift in the US economy. The relative importance of manufacturing in most G7 countries has already declined in favor of higher-growth service sectors.

A critical distinction to bear in mind is the size of Canada’ resource economy relative to its overall economy, a clear advantage our neighbors to the north hold vis a vis other developed economies. As, for example, auto manufacturing in Ontario declined, there was enough activity in Alberta to buoy the national employment rate.

Following two months of small increases, employment in Canada was unchanged in May 2008. According to StatsCan, the unemployment rate remained at 6.1 percent. Over the past 12 months, employment has risen by 339,000, or 2 percent. Despite slower employment growth in recent months, the participation rate remained near its record high of 63.8 percent in May.

Since 2005, Ontario has lost 14 percent of its manufacturing employment while Quebec has lost 15 percent. Yet despite the loss of more than 300,000 manufacturing jobs, total employment increased 2.1 percent during the past year, slightly topping the pace of the prior five years.

And wage growth continues. Year-over-year growth in average hourly wages was 4.3 percent in April. In May, the average hourly wage was 4.8 percent higher than a year earlier and well above the most recent increase of 1.7 percent in consumer prices. Since September 2007, year-over-year increases in average hourly wages have exceeded 4 percent.

The strength of Canada’s resource economy has also led to significant improvement in its terms of trade, which has boosted income growth. Since the loonie began its rise six years ago, export prices have risen 14 percent while import prices have dropped 11 percent, generating a sustained run-up in Canada’s terms of trade and boosting Canadian real income, which is now rising at a 3.7 percent year-over-year pace compared with 1.5 percent for the US.

How well Canada is able to withstand a longer-term US-led global slowdown is a question best framed by two interrelated megatrends: Asia’s emergence and the concomitant energy bull market.

Bank of Canada (BoC) Gov. Mark Carney recently described the situation as a “commodity super cycle.” The current boom has seen price increases on a greater scale, across a greater number of commodities, lasting longer. Since 2002, grain and oilseed prices have more than doubled, base metals have tripled, and oil has quadrupled. Beyond scope and magnitude, the current boom started earlier in the global economic growth cycle and has endured longer; this one may signal a truly unique period of global growth.   

Emerging markets and developing economies have accounted for nearly 95 percent of the increased demand for oil since 2003. Commodity prices are tightly linked to globalization; rapid growth in emerging-market economies, particularly in Asia, is driving most of the gains.

The emergence is best described by sustained growth in per-capita income, rapid industrialization and more intensive use of commodities in production. Carney pointed to BoC research suggesting that, while oil and metals prices have historically moved with the business cycle in the developed world, that relationship has broken down during the past decade. A 2007 BoC working paper concluded that “industrial activity in Asia now appears to be the dominant driver of oil-price movements.” And China alone will be the world’s largest consumer of energy by 2010.

But emerging-Asia-led demand has been met with a weak supply response. OPEC’s annual production has declined by 2 percent since 2005, and non-OPEC supply has disappointed. Among Organisation for Economic Co-operation and Development (OECD) countries, oil output has fallen by 8 percent since 2002.

Inventories are tight at 31 days, and spare capacity is limited. But demand is inelastic right now, so any actual or perceived supply disruptions can cause huge price spikes.

High prices will, however, eventually lead to the development and exploitation of new supplies and alternatives. And Canada will be one of the most important marginal suppliers based on the enormous reserves estimated to lie within the oil sands.

Alberta Finance and Enterprise reports that more than CAD150 billion of new investment is planned or is already underway in the oil sands. Output is expected to grow by 3 million barrels per day by 2020, which represents about 15 percent of expected marginal global demand growth.

We’ll know soon enough the impact of slowing G7 growth on the emerging economies. But the forces at work in Asia and in other emerging regions will be difficult to contain.

Canada’s economy could prove surprisingly resilient in the face of the US slump, as long as global commodity prices remain robust. Surging wages in a low-inflation environment are likely to bolster domestic consumption–despite slumping nonenergy US exports–and allow economic expansion to resume. In terms of nominal growth, Canada is still way ahead of many other countries, thanks to soaring commodity prices. Employment is still rising, consumer spending is fairly healthy, business investment is still growing, and real incomes are growing as a result of the commodities boom.