By Dr. Sherry Cooper, Chief Economist Dominion Lending Centres
According to data released on August 31st by Statistics Canada, the Canadian economy declined at a 1.6% annual pace in the second quarter, the largest quarterly decline since the global financial crisis in Q2 2009. In comparison, the U.S. economy grew at a 1.1% annual rate last quarter, more sluggish than expected earlier this year. The weakness in Canada cannot be fully attributed to the decline in oil and gas production and the wildfire in Fort McMurray. Even without this effect, real (inflation-adjusted) GDP grew by a mere 0.4% compared to a 2.5% annual pace in the first quarter. The other major depressant for the Canadian economy was the largest decline in exports since the first quarter of 2009 as well as continued weakness in business fixed investment.
Exports of goods and services fell 4.5% last quarter (quarter/quarter, -16.7% annualized) reflecting weakness in most export categories. This followed a 1.9% decline in the first three months of this year. Motor vehicles and parts exports were down 5.8% q/q, mostly because of lower exports of cars and light tricks (-6.6%). Exports of consumer goods decreased 6.8%, the largest decline since the second quarter of 2003. Stats Canada further reported that ” lower exports of crude oil and crude bitumen (-9.6%) and refined petroleum energy products (-19.6%) pushed down exports of energy products (-7.5%). Exports of metal ores and non-metallic minerals were down 17.5%, the largest drop since the first quarter of 2009. The only major offset to the decline in exports was aircraft and other transportation equipment and parts, which rebounded 5.6% following two quarters of decrease.” Exports of services posted a modest gain, as a rise in commercial services exports more than offset the decrease in transportation services.
Another weak spot was business capital formation–investment in structures, machinery and equipment and intellectual property. Investment in all but residential structures nosedived as construction of homes increased at a meager 1.2% annual pace, down sharply from the 11.3% annualized gain in Q1.
Adding to economic activity last quarter were consumer and government spending. Consumers have led the way for the economy for more than a year, growing at a 2.2% annual pace, in line with the past four quarters. However, auto sales decreased following four consecutive quarterly increases. Expenditures by Canadians abroad rose 2.1%, as a result of higher outbound travel and an appreciation of the Canadian/ U.S. dollar exchange rate.The household debt service ratio (defined as household mortgage and non-mortgage payments divided by disposable income) increased slightly from 14.06% in the first quarter to 14.15% in the second quarter, as interest and obligated payments grew.
Government final consumption expenditure increased at a 4.2% annual rate, largely the result of the wildfires. Government fixed capital formation, which includes infrastructure spending, rose 2.7% following four consecutive quarterly contractions.
On a more positive note, Statscan also released GDP data for June showing that the economy ended Q2 on a stronger footing. June GDP rebounded with a better than expected 0.6% gain, and less than half came from rebounding oil, gas and mining, as manufacturing also showed a positive spring back. This bodes well for a sizable bounce in economic activity in the third quarter.
The June data also confirmed the recent slowdown in housing. Construction declined for the third month in a row in June. Real estate agents and brokers posted a second consecutive monthly decline, as home resales activity was down. This is in line with the Canadian Real Estate Association reports, providing more recent data showing resales slowed further in July.
The dismal Q2 decline in economic activity was worse than the 1.0% downturn predicted by the Bank of Canada in its July monetary policy report. But the Bank also expected a 3.5% rebound this quarter. The July introduction of the federal government’s new Canada child benefit and an increase in infrastructure spending should boost the economy meaningfully in the second half of this year. The Bank of Canada is likely to remain on the sidelines assessing the effect of these policy changes.