Canada: GDP growth surges in Q2
August 31, 2017
The Canadian economy was the fastest-growing of the G7 countries in Q2, defying market expectations. GDP grew a spectacular 4.5% at a seasonally-adjusted annualized rate (SAAR), riding on the back of an already-strong 3.7% growth in Q1. The two exceptional quarters of growth in the first half of 2017 has made this half year Canada’s best since 2002.
Q2’s rapid growth was primarily driven by an outstanding performance by the external sector. Export growth accelerated as oil production picked up pace and the effects of oil-price shock adjustments from the previous year subsided. Exports expanded a robust 9.6% SAAR, the strongest performance since Q2 2014 (Q1: +1.5% SAAR) and far outpacing the growth of imports, which decelerated from Q1 (Q2: +7.4% SAAR; Q1: +15.6% SAAR). Subsequently, the external sector’s net contribution to overall growth was 0.7 percentage points (Q1: -4.4 percentage points).
The growth in Q2 was also partly driven by solid consumer spending, which was supported by higher disposable income, a low unemployment rate and higher home values. Household consumption grew 4.6% SAAR in Q2, a slight pullback from Q1’s 4.8% expansion (previously reported: +4.3% SAAR), but a strong reading nonetheless. One interesting development in Q2 was that the household savings rate increased, potentially signaling that the increase in consumer spending did not fuel greater household debt, which remains one of the highest among OECD member countries. Fixed investment grew at a more modest pace in Q2 compared to Q1’s strong rebound (Q2: +1.9% SAAR; Q1: +10.5% SAAR). Business non-residential investment continued on the path of recovery in Q2, with back-to-back growth following eight months of decline. On the other hand, residential investment contracted in Q2, partially due to the new tax in Ontario on home purchases by foreign buyers that came into effect in April, as well as a decline in ownership transfer costs.
The robust print for Q2 will likely encourage the Bank of Canada to move forward with its plan to raise rates, as this quarter’s GDP report showed growth in nearly all components, which implies that the economy is beginning to approach full capacity. The Bank raised the benchmark rate for the first time in July and will reveal its next monetary policy decision on 6 September. Apart from the resilient growth, the Central Bank will be particularly attentive to the high consumer debt levels.