Canada's Quarter 1 and the Grande Prairie Economy

Published June 3, 2008

Canada’s Quarter 1, 2008.

At the end of May, all the newspapers rang with headlines that sounded like economic doom and gloom for Canada. They said, in the first quarter, the economy had contracted by 0.3% (in fact, Real GDP contracted by just 0.1%). Yet, for some reason, no-one seemed to panic. It feels like everyone just shrugged, sipped their coffee, and went back to doing what they were doing.

Why?

Because the headlines don’t tell the whole story, and the whole story isn’t really all that bad. Let me explain.

Yes, the Canadian economy contracted in Q1, 2008 but there is a single good reason for that: motor vehicles. Domestic demand for motor vehicles was quite strong thanks to a high $CAD and some great dealer incentives. The deals were good enough to help draw down the nation’s total inventories which had been growing in previous quarters.

But the domestic demand was not enough to offset the sizeable reduction in motor vehicle exports. With US gas prices touching $4.00 a gallon, and a weak $USD increasing the retail price of Canadian-built cars, the Americans are taking a wait-and-see approach to their new vehicle purchases. If we factor out the motor vehicles, Canadian exports in all other sectors grew by 0.8%, such is the importance of motor vehicles to Canada’s manufacturing sector. By the way, Canada’s manufacturing industry has been decreasing for years as the economy restructures away from manufacturing and towards commodities and services.

So, the other sectors grew their exports. Corporate profits also grew, wages and salaries grew, and personal disposable income grew. Consumers have more money to spend, and while retail sales in Q1 didn’t grow as fast as they have previously, they still grew at 0.6%

Personal savings were up by 2.7%, which means the banks have more money to lend. Combine that with low Bank of Canada cash rates, and the banks have fewer reasons to be as credit-shy as they have been.

While residential construction contracted, business construction expanded. That’s good news because it means businesses are expanding their production abilities which in turn means they expect the demand for their goods and services to grow.

The sales of durable goods grew despite a slowdown in housing growth. Why? People are now renovating after years of flipping houses and condos. If you have shares in Rona, you will be happy knowing that you’ll probably be getting a nice dividend come Q4 2008.

What does it all mean?

The Canadian economy is not in bad shape. The government, consumers and businesses are still spending money, albeit at a slower rate than last year.

Inflationary pressures are not (yet) harmful. The Bank of Canada is still printing money to ensure there’s plenty to spend. The interest rates are low (and will probably drop again on June 10) to encourage borrowing and investment in machinery and equipment. The $USD is regaining a little strength, and the oil prices are leveling off.

After a few months of flux and fluctuation, the Canadian economy is starting to find its new equilibrium. But higher oil prices are yet to be felt throughout the entire economy, so inflation remains a real threat. More economic turmoil could still be heading our way.

Grande Prairie’s economy.

For Grande Prairie, a natural gas economy, the future is bright. As oil prices go, so goes natural gas. From March 7 to May 30, natural gas prices have gone from CAD$9.46/mmbtu to CAD$11.67/mmbtu. Stored inventories are running low, the vulnerable Mexican Gulf is entering another season of hurricanes, and demand is increasing, so the price rises. It will probably hit around CAD$13 by the fall. At these prices, it becomes attractive to explore for more reserves and start drilling again. More work for seismologists, surveyors, drillers, and rig workers, which means potentially more money for the local economy, a population boom, and another housing spike.

This time, businesses in the Grande Prairie area should be ready for it. It’s coming.

Think about all these factors. Give consideration to how impact-proof your business is.

Ask yourself these questions:

What will our customers do?

What other products/services can they buy to substitute for ours?

How willing are they to spend money? How will that change?

What is our competition going to do?

Are there other market segments we can enter?

What flexibility is there in our product/service offerings?

What are our suppliers going to do?

Are we ready to reduce our costs?

Are we ready for a sudden spike in demand?

What can we do to control our growth and avoid the out-of-control expansion of 2006 and 2007?

Change is happening. And it’s going to happen some more.

Plan for it now.

— Michael Hogan