Canada’s Economy Faces Setbacks in Q2

OTTAWA–Canada’s economy faced setbacks in the second quarter of this year, indicating a more subdued performance than expected. These developments come ahead of the central bank’s upcoming interest rate decision next week.

According to Statistics Canada, gross domestic product (GDP), which measures the overall production of goods and services in the country, contracted at a seasonally adjusted annualized rate of 0.2% during the three-month period. This decline follows a rebound in the first quarter, although growth was revised down from an initial estimate of 3.1% to 2.6%.

The second-quarter performance fell significantly short of economists’ predictions, who had anticipated a 1.2% expansion. Moreover, it contradicts the Bank of Canada’s forecast of 1.5% growth. These figures add to a series of recent indicators suggesting a more muted economy following a sequence of interest rate hikes aimed at curbing inflation.

The downturn in the housing sector played a major role in holding back economic growth during this period. Housing investment experienced its fifth consecutive quarterly decline, driven by decreased construction activity in most provinces and territories. Rising borrowing costs and reduced demand for mortgage funds contributed to this decline.

Furthermore, businesses saw the smallest increase in stock accumulation since the final quarter of 2021, while exports of goods and services faltered. Additionally, household spending experienced a significant slowdown during this period.

This latest data serves as the final major indicator to be released before the central bank’s interest rate decision next week. The Bank of Canada had recently resumed raising rates after a brief pause, bringing the policy rate to a 22-year high of 5% through consecutive increases in June and July. Policymakers have emphasized that forthcoming data will determine whether further tightening measures are necessary.

Canada’s Economy Shows Signs of Slowing Down

The latest data on Canada’s economy has provided the Bank of Canada with some reassurance that higher interest rates are successfully curbing demand. The bank has projected that the country’s gross domestic product (GDP) will slow down, with an average growth of about 1% in the second half of this year. This slowdown is expected to be a result of higher interest rates that are impacting household spending and business investments. However, the bank anticipates a gradual recovery starting from the second half of 2024.

While inflation has been gradually decelerating since its peak last summer, it is still more than a percentage point above the central bank’s target of 2%. Additionally, the jobless rate has increased for three consecutive months.

The GDP data for June revealed a contraction of 0.2% at the industry level compared to the previous month. This drop was in line with the advance estimate from the data agency. The decline in wholesale trade, coupled with forest fires in Quebec that affected industries such as mining, rail transport, and campgrounds, contributed to this contraction. Early data for July suggests that GDP remained mostly unchanged, with weaknesses seen in manufacturing, transportation and warehousing, and construction sectors, according to Statistics Canada.

In the second quarter, the final domestic demand, which measures spending across all sectors of the economy, remained steady compared to the previous quarter with nonannualized growth of 0.3%.

However, Canada’s terms of trade, which reflect the net income from export sales, continued to decline for the fourth consecutive quarter, dropping by 0.2%. This decline can be attributed to lower prices for goods.

On a positive note, employee compensation experienced a sharper increase in the second quarter, rising by 2.2% following a 1.9% increase in the previous quarter. This increase was mainly driven by higher average wages. It is worth mentioning that these figures included a retroactive payment for healthcare in the province of Ontario and a retroactive pay bump for Canadian Armed Forces members.

Although household disposable income accelerated during the quarter, consumption expenditure grew at one of the slowest rates in two years in nominal terms. As a result, the household savings rate rose from 3.7% in the first quarter to 5.1%.

It is important to note that these trends and indicators suggest potential challenges ahead for Canada’s economy. The Bank of Canada will continue to closely monitor these developments to ensure the well-being and stability of the country’s economic landscape.

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