Canada: GDP contracts sharply in Q2
August 31, 2016
In Q2 the Canadian economy recorded its worst performance since the global financial crisis, largely due to the Fort McMurray wildfires. According to Statistics Canada, GDP fell at a seasonally adjusted annualized rate (SAAR) of 1.6% in Q2, faring worse than market expectations of a 1.5% drop. The reading contrasts sharply with the relatively strong 2.5% expansion recorded in Q1 (previously reported: +2.4% SAAR). The decline comes as no surprise after fires in Alberta temporarily disrupted oil production in May and forced the evacuation of Fort McMurray. However, the economy ended the quarter with growth in June as oil production started to resume.
Exports were largely responsible for Q2’s bleak GDP figure as they declined an abysmal 16.7%, which contrasted the 8.0% expansion seen in Q1. Breaking down the export figure reveals that the decrease was widespread throughout most export categories, but the largest drops were registered in the energy products categories, as expected. Meanwhile, imports rose a meager 1.1% in Q2. Consequently, the external sector’s net contribution to growth was minus 5.9 percentage points in Q2, which was down from Q1’s 2.1 percentage-point contribution.
On the positive side, total consumption increased 2.7% in Q2 (Q1: +2.5% SAAR). The print reflected higher government consumption as a result of government spending associated with May’s wildfires and a similarly robust growth in private consumption (4.2% and 2.2%, respectively). Meanwhile, fixed investment expanded 0.1% in Q2 (Q1: -0.6% SAAR), the first increase in six quarters. This breakdown shows that Canada’s domestic demand remained resilient, despite this quarter’s GDP result; in fact, Statistics Canada stated that the economy actually grew 0.1% over the previous quarter, if the impact of the large drop in oil output is excluded.
GDP is widely expected to rebound in Q3, as oil production and prices pick up and the rebuilding efforts begin in Fort McMurray. The economy should also be bolstered next quarter by the federal government’s new Canada child benefit program and increased infrastructure spending.
Author: Luis Lopez Vivas, Economist