Despite some weak performance in key data, the slowdown in the Canadian economy is likely to be a modest one, says a new report from research firm Global Insight.

“Recent monthly GDP numbers indicate a worrisome loss of momentum in the Canadian economy. As long as commodity prices remain elevated and Canadian house prices continue to appreciate, however, the slowdown will be minor rather than major,” it says.

“Canadian forecasters generally predict a slight pickup in Canada’s GDP growth this year from the 2.9% pace of last year, followed by a minor slowdown to just under 3.0% in 2007. In stark contrast to this outlook, the Canadian economy stalled in May, after barely moving forward in March and April,” it reports. “Even assuming a decent rebound in June, second-quarter national accounts will likely show GDP growth around 2.0%.

“One could focus on the sharp deceleration from the 3.8% first-quarter pace to conclude that the widely anticipated slowdown has arrived earlier, and that it will be sharper than predicted,” it says. “While concerns about a major slowdown this year and next are legitimate, several factors lead Global Insight to believe that the second-quarter soft patch will yield to a rebound this summer, followed by a minor slowdown through the end of next year.”

The firm says that money-supply growth bottomed out in mid-2005, but has recently moved up, “suggesting extra liquidity in the system to support solid growth in spending and investment”. Also, output expectations by various business groups are consistent with the liquidity story, it notes.

Global Insight believes offsets from commodity prices and the housing market will moderate the extent of the coming slowdown. “The boom in commodity prices has lifted corporate profits and filled government coffers with windfall revenue. The impact of high commodity prices on GDP is difficult to estimate precisely, partly because it critically depends on the extent to which the higher prices have been driven by strong world growth. Still, it is fair to say that without this boom, business investment and commodity exports would have suffered, as would have government spending and the tax burden,” it suggests.

“Regarding the housing market, further appreciation in home prices will add as much as 0.5 percentage point to the annualized rate of GDP growth by stimulating consumer demand through the end of next year,” Global Insight says.

“With the sizable tightening in monetary conditions since last September and the prospective deceleration of U.S. demand, a reduction in Canadian growth is inevitable. The recent monthly GDP numbers indicate a worrisome loss of momentum in the economy. So long as commodity prices remain elevated and Canadian house prices continue to appreciate, however, the slowdown will be minor rather than major,” it concludes.