Canada Growth Slows to 1% in Second Quarter; June GDP Shrank

Canadian economic momentum decelerated in the second quarter after an unexpectedly strong start to the year.

(Bloomberg) — Canadian economic momentum decelerated in the second quarter after an unexpectedly strong start to the year.

Preliminary data suggest gross domestic product decreased 0.2% in June, the first contraction this year, led lower by the wholesale and manufacturing sectors, Statistics Canada reported Friday in Ottawa. 

That followed a 0.3% expansion in May, matching the median estimate in a Bloomberg survey of economists. Canadian bond yields ticked higher; the loonie initially rose, then gave back those gains. 

Overall, the monthly gains — including April’s 0.1% boost — point to annualized growth of 1% in the second quarter. Although it will likely be revised, that’s slower than the 1.5% pace projected by the Bank of Canada earlier this month, and much weaker than the 3.1% growth in the first three months of 2023.

“We’re starting to see some evidence that almost 500 basis of points of tightening, compressed in a very short window of time, is starting to have an impact on the economy more broadly,” Robert Kavcic, a senior economist at Bank of Montreal, said on BNN Bloomberg Television. “We’re seeing it in areas like housing, we’re seeing it areas like consumer spending, where spending volumes at the retail level have really flattened out.”

Governor Tiff Macklem and his officials forecast economic growth to moderate to an average of about 1% through the second half of this year and the first half of 2024. They expect higher interest rates to weigh on household spending and business investment, and a global slowdown to restrain export growth.

Friday’s report supports that projection and suggests Canada’s economy is entering a softer patch. Growth in consumption spending is expected to slow over the second half of this year, as demand for rate-sensitive goods and services weakens and more households renew their mortgages at higher rates.

In the US, by contrast, GDP expanded at a 2.4% annualized pace in the second quarter, up from a 2% pace in the first, with much of the growth driven by consumer spending and non-residential investment.

The unexpected strength of Canadian household spending and increase in exports, which lifted economic activity and the labor market, spurred the Bank of Canada to abandon a pause to its tightening cycle in June. Policymakers said monetary policy was insufficiently restrictive to cool excess demand, prompting them to raise the overnight rate for two straight meetings, to the 5% mark — the highest in 22 years.

Real Estate Strength

In May, service-producing industries were up 0.5%, while goods-producing industries partially offset that gain with a 0.3% decline.

Manufacturing, wholesale and public administration drove the increase that month, with the latter rising 1.4%, bouncing back after most federal government workers who were on strike returned to work by the end of April.

One other bright spot in the economy is the real estate sector. Demand for real estate remained strong, and activities related to real estate advanced for a fourth consecutive month. The 7.6% increase in May was led by higher home reselling activity in the majority of Canada’s largest markets, including Toronto, Vancouver, Calgary, Edmonton and Ottawa.

Manufacturing advanced 1.6% in May, the largest increase since October 2021, and wholesale trade jumped 2.9%.

But the advance estimate suggests that downward movements for the wholesale trade and manufacturing sectors in June more than offset the increases recorded in May.

Canada’s ongoing forest fires have already hampered growth in some energy-related industries. Following four months of growth, the oil and gas extraction subsector fell 3.6% in May. Oil and gas extraction, excluding the oil sands, dropped 6.6%. That’s the industry’s largest monthly contraction since April 2020, with a steep drop in both natural gas extraction and crude oil.

–With assistance from Erik Hertzberg and Stephen Wicary.

(Updates with market reaction in third paragraph and economist commentary)

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