Canada's Q2 GDP -- strong but a bit strange

After eking out only minimal growth in the two preceding quarters, Canada's real GDP surged at a 3.7 percent annualized rate in Q2. This was the strongest performance in two years and comfortably topped the expert consensus expectation.  Moreover, GDP grew 0.2 percent in June, a strong "handoff" to Q3 that likely portends another positive showing for the current quarter as a whole.

The headline number would appear to give the Bank of Canada every reason to leave interest rates unchanged at next week's Governing Council meeting, and that is indeed the likeliest outcome.  However, the composition of the growth in Q2 will raise a few alarms at the Bank.  The strong headline number was entirely the result of the external sector: export volumes rose 3.7 percent in the quarter (NB: not annualized), led by a 5.9 percent jump in energy exports, while import volumes fell by 1 percent.

These robust numbers were offset by some surprising weakness in the domestic economy: final domestic demand actually edged lower in the quarter.  Real consumer spending rose only 0.1 percent, an unexpected outcome given the continuing strength in the employment market and the recent surge in wage growth.  There have been signs recently that the jobs market is softening; if consumers were already becoming cautious ahead of that softening, as today's report suggests, then consumer spending could become a drag on overall growth for the remainder of the year.* 

The second quarter also saw a 1.6 percent decline in business investment, led by a sharp fall in outlays on machinery and equipment.  Notably, StatsCan reports a fall of more than 60 percent in spending on aircraft and other transportation equipment, a factor that also contributed to the decline in import volumes. This may well be attributable to the halt in deliveries of the Boeing 737 Max, which three Canadian airlines had been adding to their fleets.

Regardless of the noise in the data, the fact remains that the 3.7 percent growth figure is comfortably the highest in the G7, and almost twice as fast as the growth posted by the US in the same quarter. While Bank of Canada Governor Poloz and his colleagues will keep a wary eye on the external risks to the economy, there is no reason for them to rush into a rate cut just yet.

* The data for June showed some improvement in the consumer sector, but StatsCan attributes this to the Toronto Raptors' NBA playoff success, the very definition of a one-off event (at least until next year!).