• Although the faster-than-expected GDP growth in the second quarter comes on the heels of a downward revision to Q1, it is still the fastest pace of growth in three years. Is it time to drop the neutral bias at the BoC?

Much Better Sequential Growth

Real Canadian GDP grew at a 3.1 percent annualized rate in the second quarter which was better than the 2.7 percent consensus expectation. It was the fastest quarterly growth rate in almost three years. It bears noting that first quarter growth figures, which were already disappointing, were revised to an even slower growth rate of just 0.9 percent. It appears that the Canadian economy, like its neighbor to the south, had a rough start to the year, partly attributable to an unusually stormy and cold winter, but bounced back nicely in the second quarter.

In terms of the major components of GDP, the only noteworthy headwind for growth in the second quarter was a slower pace of inventory building which resulted in a 1.9 percentage point drag on headline GDP growth.

Business fixed investment spending, which had been negative in the first quarter, grew at a 2.8 percent annualized rate in the second quarter. The strength here was somewhat unexpected given indications of vulnerability. For example, the Ivey PMI was in contraction territory for two months of the second quarter, while manufacturing orders were lower, on average, in the second quarter when compared to the first. The fact that the Ivey returned to expansion territory in July and that orders are on an uptrend should support prospects for business spending in the current quarter.

Consumer spending increased just as it has every quarter without a miss since the economy began to bounce back from recession in 2009. The 3.8 percent annualized growth rate for consumer outlays lifted overall GDP by 2.1 percentage points.

With such strong consumer spending, imports grew at an 11.1 percent annualized clip in the second quarter, the fastest pace of import growth since 2010. Somewhat surprisingly, exports grew even faster and the net effect on GDP from trade was a boost of 1.7 percentage points.

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