Canadian economic growth lags expectations in Q2; July estimate points to contraction

Economists expect the Bank of Canada to move forward with another aggressive interest rate hike next week after the release of data showing the economy remained in relatively good shape during the second quarter of the year.

The Canadian economy grew at an annual rate of 3.3% in the second quarter, Statistics Canada said Wednesday in its latest report on real gross domestic product.

For comparison, the economy grew by an annual rate of 3.1% in the first quarter.

While the 3.3% figure falls short of the agency’s preliminary estimate of 4.6%, BMO chief economist Douglas Porter said in a typical year, it would be considered above-average growth.

Tu Nguyen, an economist with accounting and consultancy firm RSM Canada, said there were few surprises in the GDP data when it’s broken down into its components.

“We see pretty much what we had expected, which is strong business investment, a lot of spending by households on services, which again, it’s not surprising as pandemic restrictions dropped,” said Nguyen. “And on the flip side, we saw the housing sector not doing very well, which has been happening since the first interest rate hike that happened in March.”

According to the federal agency, real GDP grew by 0.8% in the second quarter, marking the fourth consecutive quarter of growth.

Statistics Canada also released its monthly report, which finds real GDP grew by 0.1% in June after staying flat in May.

Porter said the latest GDP data is a “mixed bag” given some sectors showed weakness while others were in good shape.

“I think it just shows how …volatile this economy is. And, you know, it doesn’t lend itself to easy characterizations,” Porter said.

Wednesday’s report said businesses ramped up their investments in inventories, which served as the major contributor to growth. Businesses also increased their investments in engineering structures and machinery and equipment.

Meanwhile, household spending on semi-durable goods increased, with the rise driven by an increase in spending on clothing and footwear as more people headed back to the office.

At the same time, housing investment declined in the second quarter along with household spending on durable goods.

The Bank of Canada has called the Canadian economy “overheated” and has been combating high inflation with a series of interest rate hikes.

The central bank is hoping higher borrowing rates will slow down economic activity and bring inflation back to its target of 2%.

With the annual inflation rate reaching 7.6% in July, the Bank of Canada is expected to announce another supersized interest rate hike Sept. 7.

Nguyen said the consensus among central bankers around the world has been that inflation is broad-based, meaning prices are rising quickly across the economy, and therefore requires forceful action on their parts.

“I don’t see the Bank of Canada deviate from that strategy moving forward. And I expect them to raise interest rates at every single meeting for the rest of the year,” Nguyen said.

BMO is forecasting the central bank to raise its key interest rate by three-quarters of a percentage point next week, but Porter said he wouldn’t be surprised if it opted for a more aggressive rate hike.

“I think in some ways, the bank once wants to keep the market on its toes a bit. And I think it also wants to show that it’s planning on being very tough on inflation,” Porter said.

Meanwhile, an early reading for July points to a contraction of 0.1% as economists widely expect an economic slowdown ahead.

How much Canadians feel the slowdown will depend on their individual circumstances, Porter said, including what sector they’re employed in and whether they’re a borrower or saver.

Additionally, the Statistics Canada report showed wages were up 2% in the second quarter, with Ontario and Alberta contributing the most to the national increase. Statistics Canada said the Atlantic provinces’ wage growth for the quarter were almost double the national rate.

While disposable income rose for households, their savings rate declined from 9.5% in the first quarter to 6.2%, largely due to inflation. However, the savings rate remains well above pre-pandemic levels, which was 2.7% at the end of 2019. While the report provides the aggregate savings rate, Statistics Canada noted that savings rates tend to be higher among those in higher income brackets.

“Although these estimates suggest ongoing resiliency in household net savings, inflationary pressures on consumption and trends in employee compensation will likely be key determinants of future outcomes,” the agency said in its report.