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Canada: So-so Details in a Solid Q2 GDP Report

The Canadian economy expanded by 2.9% (q/q annualized) in the second quarter. This was well ahead of the (upwardly revised) 1.4% pace marked at the start of the year, although it fell a bit short of market (and our) expectations. Taking modest price gains into account, nominal GDP rose 5.1% in Q2.

Exports were in the driver’s seat, up 12.3%. Energy exports and consumer goods led the way, up 24.2% and 27.6% respectively. Offsetting this somewhat was an acceleration of import growth to 6.5%.

Consumer spending also played an important role, as household consumption rose 2.6%. Service spending rose by 3.2%, while expenditures on durable goods were up a modest 2.1%.

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If there is a dark spot in the report, it has to be business investment. Investment in non-residential structures rose a modest 2.2%, the slowest pace of expansion in the past six quarters. Machinery and equipment spending was also modest, up just 1.4% as firms pulled back their motor vehicle spending after a robust start to the year. Interestingly, residential structures investment rose by a modest 1.1% as solid renovation activity offset declines in new construction and ownership transfer costs (resales).

Real growth may have accelerated, but income growth decelerated modestly. Compensation of employees was up 2.9%, the slowest pace since mid-2016. The household saving rate fell to 3.4% from a (downwardly) revised rate of 3.9% in Q1.

On a monthly basis, we got a soft end to the quarter. Monthly GDP was flat in June, with 12 of 20 major industries expanding output. This was largely due to a disruption in the oil and gas sector, which led goods output lower (-0.2%). Conversely, services output rose 0.1%, marking 27 straight months of expansion, a new record.

Key Implications

We’ll take it. Investment aside, there really isn’t too much to complain about in today’s figures. The surge of exports was driven by the resolution of supply disruptions earlier in the year, and so should be faded, but shipments of consumer goods were solid, and the domestic details were generally encouraging. Consumers felt comfortable spending a little more, and it was a pleasant surprise to see residential investment in positive territory thanks to renovation activity. The softer pace of investment is sure to get a lot of attention. We note that at least some of the deceleration is due to a normalization of spending on vehicles after a robust start to the year, but this component is definitely one to watch carefully going forward.

Looking ahead, a more ‘normal’ pace of growth should prevail. Housing activity seems to have bottomed, and so we expect residential investment to continue making a positive contribution, counterbalanced by disruptions in the energy sector. With labour markets and incomes still decent, solid U.S. demand, and still accommodative monetary policy, the pieces remain in place for modestly above-trend growth going forward.

The Q2 economic performance was pretty much bang on Bank of Canada expectations, and so there is little reason for them to alter the path of their policy interest rate. Another hike is coming, but communication opportunities and the timing of the Business Outlook Survey both make the Bank of Canada’s October policy meeting the most likely timing for the next move.