Canada: Q2 GDP drops an annualized 1.6% - RBC Economics

Paul Ferley, Assistant Chief Economist at RBC Economics, suggests that the Canada’s Q2 GDP decline follows an upwardly revised 2.5% increase in Q1 (2.4% previously) and was generally in line with market expectations of a 1.5% drop.

Key Quotes

“The separately released June GDP rose a stronger-than-expected 0.6% that fully reversed the 0.6% plunge in May.

A sizeable decline in Q2 GDP was generally expected going into the report based on earlier indications that the Alberta wildfires, and attendant shutdowns of oil sands production, sent May GDP down sharply. On a quarterly expenditure basis the shutdowns weighed on energy exports in the quarter contributing to overall exports sinking an annualized 16.7%.

With imports rising 1.1%, net exports subtracted a sizeable 5.9 percentage points from the Q2 annualized GDP growth rate. The shutdowns likely also limited the bounceback in inventories that still managed to contribute to 2.1 percentage points to Q2 growth. Prior to Q2, inventories subtracted an average of 1.4 ppt for the past four quarters.

Consumer spending rose 2.2% while residential investment was up 1.2%. Government spending rose a stronger-than-expected 4.2% though reportedly in part due wildfire relief efforts. Busi-ness investment continued to decline though by a smaller-than-expected 1.9%.

Half of the monthly increase in June GDP was attributable to the mining component rising 3.6% reflecting the return of oil sands production. Manufacturing was also up a stronger-than-expected 1.8% with a solid 2.4% increase in durables manufacturing and a 1.0% gain in the non-durables component.

Our Take:

The quarterly decline in Q2 GDP was generally anticipated going into the report. The Bank of Canada’s recent July forecast had projected a decline in the quarter albeit at a slightly smaller rate of 1.0%. However, the weakness is viewed as temporary with the central bank forecasting Q3 growth rising to 3.5%. Indications of June GDP’s robust increase bodes well for this rebound to occur though this monthly strength will need to be sustained into July. Beyond Q3, the central bank projects growth to moderate though still increase at an above-potential rate. As long as this outlook continues to be confirmed by the data, the Bank of Canada is expected to remain on the side-lines. Our forecast assumes a steady overnight rate at the cur-rent 0.50% through the end of next year.”