Canada: GDP growth accelerates in Q2
Economic momentum picked up in the second quarter, with seasonally-adjusted annualized (SAAR) growth accelerating 2.9% over the previous quarter. The print was broadly in line with both market expectations of 3.0% and the Bank of Canada’s 2.8% estimate. Moreover, the reading was above Q1’s upwardly revised 1.4% expansion (previously reported: +1.3% quarter-on-quarter SAAR). Stronger growth in Q2 was primarily driven by soaring exports, which recorded the strongest gain in four years, while the domestic economy also advanced modestly.
Domestic demand gained traction in the second quarter, expanding 2.1% SAAR from a quarter earlier (Q1: +1.7% qoq SAAR), although results were mixed across components. Private consumption growth more than doubled the first’s quarter’s print at 2.6% SAAR, buoyed by strong consumer spending on services (Q1: +1.0% qoq SAAR). However, household spending was partly financed by savings as the savings rate fell to a one-year low in the quarter. Meanwhile, government spending slowed (Q2: +1.6% qoq SAAR; Q1: +2.6% qoq SAAR) and fixed investment eased notably on softer business investment—the weak spot in the report—which grew at the weakest pace since Q4 2016 (Q2: +0.9% qoq SAAR; Q1: +2.5% qoq SAAR). Non-residential structures, machinery and equipment investment growth decelerated considerably from the previous quarter. Residential outlays, meanwhile, recovered on strong renovation activity. Meanwhile, inventories continued to accumulate in Q2, albeit at a weaker pace than in Q1.
The external sector drove growth in the quarter with export growth surging 12.3% SAAR from a quarter earlier (Q1: +2.4% qoq SAAR), unscathed by tariffs on steel and aluminum from the United States implemented in late May and uncertainty over trade policies. Higher shipments of energy products, consumer goods, and aircrafts and aircraft parts supported the acceleration. Imports also picked up in the quarter on robust imports of refined petroleum energy products, which offset the shutdown of four Canadian refineries in April and May. On balance, the external sector contributed 1.8 percentage points to the headline reading (Q1: minus 0.6 percentage points).
In annual terms, economic growth moderated to 1.9% in the second quarter (Q1: +2.3% year-on-year).
Reflecting on the implications of Q2’s print on the economy, Brian DePratto, a senior economist at TD Economics, concluded:
“We’ll take it. Investment aside, there really isn’t too much to complain about in today’s figures. The surge of exports was driven by the resolution of supply disruptions earlier in the year, and so should be faded, but shipments of consumer goods were solid, and the domestic details were generally encouraging. Consumers felt comfortable spending a little more, and it was a pleasant surprise to see residential investment in positive territory thanks to renovation activity. The softer pace of investment is sure to get a lot of attention. We note that at least some of the deceleration is due to a normalization of spending on vehicles after a robust start to the year, but this component is definitely one to watch carefully going forward.”
Economic growth should continue to expand at a solid pace in the second half of the year, albeit softer than in Q2. A healthy labor market and a strong external sector supported by robust U.S. demand should help drive the economy. However, households’ contribution to growth is expected to moderate as consumers adjust to higher interest rates and stricter mortgage-lending rules. In fact, given Q2’s result was just marginally above the Bank’s projections and the outcome of NAFTA renegotiations remain persistently uncertain, the Bank of Canada held the overnight rate steady at its 5 September monetary policy meeting, likely delaying another rate hike until its October meeting.