A multi-family development under construction in Vancouver on May 13. DARRYL DYCK/The Globe and Mail
Canada’s economy posted strong growth in the second quarter, but there are growing signs of a slowdown as consumers struggle with soaring inflation and rising interest rates.
Real gross domestic product was flat in May, better than the initial estimate of a 0.2% drop, Statistics Canada said in a report on Friday. The economy exceeded 0.1% growth in June, according to a preliminary estimate. Thanks to stronger growth in April, Canada’s economy is on track to expand 1.1 percent in the second quarter, or an annualized rate of 4.6 percent.
For Bay Street financial analysts, the report was a mixed bag. Economic growth in the April-June period was stronger than the Bank of Canada’s forecast of 4 percent. It was also notably better than the United States, which has seen two consecutive quarters of falling GDP, prompting intense debate over whether the country is in recession.
On the other hand, recent months have seen slow growth in Canada. Consumer and business confidence is falling. Real estate has gone cold. And some high-profile tech companies, such as Shopify Inc., are announcing layoffs.
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Stephen Brown, senior economist at Capital Economics, said he was surprised by the tepid estimate for June growth, given that hours worked that month rose 1.3 percent. He also noted that Canada’s economic recovery from COVID-19 has lagged behind the pace of the US, and thus Canada’s better fortunes of late are not as impressive as they seem.
“The fact that we’re already seeing a slowdown is a little concerning,” Brown said. “We’ve been quite bearish on the outlook for Canada, just on the housing sector, but it looks like we’re having broader weakness elsewhere than perhaps expected.”
Despite the change, the Bank of Canada is widely expected to continue raising interest rates as it seeks to curb inflation that is nearing a four-decade high. The bank has raised its policy rate to 2.5% from a pandemic low of 0.25% in less than five months.
“The Bank of Canada is still expected to offer another non-standard rate hike at its next meeting” in September, Andrew Grantham, senior economist at CIBC Capital Markets, said in a note to clients. “However, we expect the impact on disposable income of high inflation and rising interest rates to begin to show more broadly in economic data in the second half of the year, which will allow the Bank of Canada to stall at rates just above 3 per cent.”
Friday’s report showed a split between goods and services in the economy, the latter of which is getting a boost from consumers embracing the travel and entertainment industries.
The transportation and storage sector rose 1.9 percent in May. Despite well-publicized headaches at major airports, economic output from air transport rose 14.1%.
The hospitality sector also rose 1.9 percent, its fourth consecutive month of expansion. Restaurant sales grew quickly this spring, despite sticker shock on menus.
The commodity side was certainly weaker. Real GDP fell 1.7% in manufacturing, the first decline in eight months. Auto production was hampered by persistent semiconductor shortages, in addition to overhauls at some assembly plants, Statscan said.
Output fell 1.6% in construction, the sector’s second consecutive monthly decline. Statscan noted that many of Ontario’s unionized construction workers were on strike in May, causing delays to several projects. Residential building construction fell in May, but activity was 11% higher than at the start of the pandemic.
“We’re seeing a decline in renovations and improvements, which is tied to the housing market,” Brown said. “Obviously, to the extent that fewer investors are flipping houses, that means they’re going to put less money into improving them.”
Mr. Brown also pointed to sales of pre-construction homes in Toronto, which have fallen sharply. “That suggests we’re going to see a slowdown in housing starts in the second half of the year, just because a lot of developers are relying on those pre-construction sales to get seed funding.”
The outlook for Canada’s economy is bleak. Fears of a recession are rising, although very few economists foresee a sustained recession. The Bank of Canada expects growth to slow to an annualized rate of 2% in the third quarter. It also expects the economy to grow by 1.8% in 2023, down sharply from 3.2% in an earlier forecast.
“Overall, we expect growth to cool markedly in the second half to below a 1 percent annual clip, a marked deceleration, albeit firmer than trends in the U.S.,” the economist wrote in Bank of Montreal boss Doug Porter in a research note.
The country, he added, “cannot completely avoid the pull of a slowdown in the US economy and the Bank of Canada’s aggressive rate hike campaign.”
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