GDP Week

“Two consecutive quarters of declining GDP” is often employed by time-pressured journalists as the “technical definition of a recession.” We’ve covered this territory in this space a couple times, most aggressively here.

The bottom line is those bodies charged with the responsibility of declaring recessions–Statistics Canada up north, the National Bureau of Economic Research in the states–take a look at a lot more than real GDP.

Alas, quick-turnaround stories and the headlines they bear leave little time or room for “a significant drop in economic activity, lasting more than a few months, as measured by employment rate and real gross domestic product,” StatsCan’s definition, or “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales,” the NBER definition.

All fussing about the media aside, Canada is struggling amid what’s now a global economic slowdown. The Organization for Economic Cooperation and Development (OECD) said Tuesday morning that the European and Japanese economies would grow more slowly than previously forecast. Eurozone countries will grow by 1.2 percent in 2008, down from a prior estimate of 1.7 percent, and Japan will expand by 1.2 percent this year, also down from 1.7 percent. The US is a bit of bright spot in the OECD’s picture, its 2008 GDP growth forecast now up to 1.8 percent from 1.2 percent.

Canada avoided the journalist’s-rule-of-thumb recession by posting 0.3 percent annualized real GDP growth for the second quarter of 2008, rebounding from a 0.2 percent slide in the first three months of the year. But nominal GDP growth grew at a 10.6 percent annualized rate in the second quarter, among the best quarterly jumps over the last 20 years; real GDP removes the impact of rising commodity prices. 

Canada’s export performance in real GDP terms looks lousy; the volume of goods and services sold abroad has in fact fallen during the US slump. But the GDP calculation of exports removes price increases, distorting the impact of Canada’s commodities. Even with export volumes declining, Canada’s total income from exports rose through the first half of this year. That means income for the average consumer as well as the big corporation continues to rise.

Other important indicators of economic health–employment, wage and income growth, corporate earnings, housing markets, financial market and credit conditions, consumer balance sheets–set Canada apart from the US (our 3.3 percent second quarter GDP number notwithstanding, and Barry says it doesn’t stand up to scrutiny) and the other members of the G7.

Canadian employment was down in July, but so far this year, employment is up by 71,700. Retail sales are still growing. Consumer incomes are still growing. Industrial production is sagging, reflecting the deterioration of Ontario’s auto manufacturing sector, but Canadian corporations reported 8.3 percent second quarter profit growth, the strongest gain since the first quarter of 2004.

The Bank of Canada’s (BoC) statement announcing its next rate decision, due Wednesday morning, will likely maintain a neutral stance, something to the effect that “upside and downside risks to both economic growth and inflation remain in balance.” Commodity prices have retreated since July, but the Canadian dollar has followed on the way down–basically a wash in terms of growth and inflation outlook. Expect the BoC to stand pat and leave the overnight interest rate unchanged at 3 percent.

The volume of Canadian economic activity is basically flat, but high commodity prices have boosted earnings. That should limit the downside to public finances and stabilize Canada’s fiscal surplus and its balance sheet.

Mark It Down: Oct. 14

Prime Minister Stephen Harper concluded his face-to-face meetings with the leaders of Canada’s three out-of-power parties over the weekend. The head of Canada’s longest-standing minority government is likely to seek the dissolution of Parliament in the next few days, triggering a fall campaign with an Oct. 14 election date.

A new poll conducted by Strategic Counsel for the Toronto Globe and Mail and CTV poll suggests Harper knows what he’s doing by engineering dysfunction sufficient to justify asking Governor General Michaëlle Jean to dissolve Parliament:

According to the poll, conducted by the Strategic Counsel, 37 per cent of Canadians would opt to vote for the Tories were an election to be held today, compared with 29 per cent for the Liberals, 17 per cent for the NDP and 9 per cent for the Green Party.

In the 2006 election, the Tories polled 36 per cent, compared with the Liberals’ 30, the NDP’s 18 and the Greens’ 5.

“With these numbers, a majority is within the reach of the Conservatives, but not yet in their grasp,” said Peter Donolo of the Strategic Counsel. “I think that’s the really important difference.”

And a follow-up story suggests what it is he’s doing (or, “Karl Rove Runs Canada, Too”):

According to the Strategic Counsel survey, of those Canadians who consider themselves Conservative in ideological orientation, 69 per cent will cast ballots for the Conservative Party, while the other 30 would split their ballots among the other four parties. By contrast, of those who consider themselves Liberal in spirit, only 51 per cent would vote Liberal, with the rest scattering to other parties. This gives the Conservatives a large starting point advantage.

It’s a tactic that has been immensely successful for the U.S. Republicans, pollster Greg Lyle said. By putting such initiatives as same-sex marriage on ballots, the Republicans have been able to bring out large numbers of supporters who vote not only on the social issue, but also for the presidential candidate who backs it.

“This is a way in which the U.S. fights campaigns that has spilled over to Canada that it hasn’t in the past,” said Mr. Lyle, managing director of Innovative Research Group, Inc.

Another poll, by Nanos Research for Sun Media, tells a slightly different tale:

The federal Conservatives, chomping at the bit for an election, can’t shake off the Liberals. And the Liberals can’t seem to pull away from the Tories.  

The latest Nanos Research poll for Sun Media shows national support for the Liberals at 35%, and for the Conservatives at 33%, virtually no shift from the last time the pollster asked Canadians which federal party they would consider voting for.

In fact, there has been very little change in support for the two major parties since late 2007. The NDP stands at 17% and the Greens at 7%. The poll was conducted during the period in which Prime Minister Stephen Harper publicly floated the idea that he might pull the plug on his own minority government despite having passed a law setting the next election date in October 2009.

We’ll be taking a deeper look at the impending Canadian elections and their potential impact on income and royalty trusts in the next Canadian Edge, which will be published Friday afternoon, Sept. 5.

About Gustav

Our in-house energy expert Elliott Gue has this to say about evaluating Hurricane Gustav’s impact.

Speaking Engagements

Fall is the perfect time to enjoy Washington, DC’s outdoor treasures and catch a glimpse of nature’s splendor. And this year you can enjoy the immediate aftermath of the Presidential election in the seat if the federal government.

Join me and my colleagues Neil George and Elliott Gue for the DC Money Show, Nov. 6-8, 2008, at The Wardman Park Marriott.

Go to http://www.moneyshow.com/ or call 800-970-4355 and refer to priority code 011362 to register as our guest.

We also have a special invitation for our readers. KCI Communications, Inc., is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with my colleagues Gregg Early, Neil George and Elliott Gue.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.

It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.

For more information, please click here or call 877-238-1270.

The Roundup

Oil & Gas

Enerplus Resources (TSX: ERF.UN, NYSE: ERF) confirmed the distribution hike it announced along with second quarter results, boosting the monthly payment to unitholders by 12 percent to CAD0.47 per unit, effective with the payment due Sept. 20 to unitholders of record on Sept. 10, 2008. The units will trade ex-dividend Sept. 8. Enerplus Resources is a buy up to USD50.

Penn West Energy Trust (TSX: PWT.UN, NYSE: PWE) is selling 10 packages of land in Alberta, British Columbia, Saskatchewan, the Northwest Territories and Wyoming that include current combined production of approximately 16,000 barrels of oil equivalent per day. Penn West will use the proceeds to reduce debt and fund future acquisitions in its core areas of operation. The trust will accept non-binding proposals through mid-October with an eye on closing any deals by year’s end. Buy Penn West Energy Trust up to USD36.

Business Trusts

Wajax Income Fund’s(TSX: WJX.UN, OTC: WJXFF) Industrial Components business unit, Kinecor, is buying Weir Process Equipment, a division of Weir Canada, for CAD25.4 million. Weir Process Equipment distributes pumps, process controls and instrumentation, filtration products and material handling equipment to the oil and gas, power generation, mining and infrastructure sectors. The Weir assets will be combined with Kinecor’s process equipment operation. For the twelve month period ended June 30, 2008, Weir Process Equipment had adjusted annual sales of approximately CAD50 million and adjusted earnings before interest, taxes and amortization of approximately CAD5 million. Wajax also announced a further CAD0.01 per unit increase in its monthly distributions for September and October, to CAD0.36 per unit per month. Hold Wajax Income Fund.