The Q1 GDP data released in April seemed to indicate a stall in U.S. economic growth. Subsequent data revealed a much steeper economic contraction of 2.9%. Was this evidence that the U.S. economy was losing steam and requiring more aggressive intervention by the central bank? Or was this merely a statistical anomaly that was not indicative of the true state of the economy? Based on additional economic data released during the quarter, it appears that the U.S. contraction in Q1 was indeed an anomaly, mostly attributed to the crippling winter weather that wreaked havoc on much of the country. Q2 data revealed that strong employment growth helped to push the unemployment rate to its lowest level since 2008, consumer confidence improved and the housing market continued to strengthen. Growth has clearly reaccelerated in Q2. The positive momentum in the U.S. economy is welcome news to Canada, as our export economy remains heavily reliant on American consumers. Rising export volumes in Canada have helped underscore the recent strength of the Canadian dollar relative to most major global currencies.
Elsewhere, the economic recovery in Europe appears more precarious as the region continues to struggle with stagnant growth and a banking system that has not fully addressed past indiscretions. But authorities remain vigilant in their efforts to stimulate growth, with sub-zero interest rates representing the latest attempt by the ECB to encourage lending and consumption. Japanese authorities remain equally committed to restoring growth in their economy, while China continues to unwind its credit bubble and transition to a more sustainable pace of growth.
Amidst this mixed macroeconomic backdrop, global equity markets marched higher this quarter, with the MSCI World Index (C$) rising 1.2%. This marks the eighth consecutive quarter that global equities have risen, a period in which cumulative returns have exceeded 50%. Chart A outlines the quarterly performance, expressed in Canadian dollars, of some of the notable equity indices around the world.
The stellar performance in Canadian equities is visually obvious, with both the S&P/TSX Composite Index and BMO Small Cap Index noticeably outpacing their global peers. This can largely be attributed to the strong performance of Canada’s influential energy sector, as the energy sub-sector in the S&P/TSX Composite Index gained 10.5% this quarter while its small-cap peer rose 15.2%. Violence and turmoil in oil-producing nations such as Iraq, Libya, and Russia have led to concerns about ongoing oil supplies, prompting a rise in oil prices and a rally in energy companies.