Canadian Q2 GDP review

In arguably one of the more highly anticipated GDP results in quite some time, the Canadian economy did indeed contract for the second quarter in a row in Q2 --- yet the results weren't quite as harsh as expected. Real GDP fell at a 0.5% annual rate in the quarter, a little less damage than the consensus call of a 1.0% drop, although the Q1 setback was revised lower to a drop of 0.8% (initially pegged at -0.6%). The good news here was that the monthly result for June showed that the 5-month string of declines was finally broken --- big-time --- as June GDP jumped 0.5% (that's not an annualized number), setting Q3 off in good form. Looking ahead, the economy returned to modest growth in the current quarter (which is already more than 2/3rds over), and remain comfortable with call of between 2.5%-to-3.0% growth for Q3.

"The recession bugs will be chattering; we will leave it to the official C.D. Howe Business Cycle committee to make the call later this year, but if this period is ultimately deemed to be a recession, it will be of the mildest variety and one of the strangest recessions ever --- consumer spending was up in both quarters and so too was employment, far from a widespread softening in the economy", notes BMO Economics.

Details of the release showed no big surprises in Q2. Business investment plunged at a 12.0% annual rate, but that was actually a lighter hit than what was expected (and was thus the source of the less negative than expected reading for the quarter). Inventories carved more than 1 ppt from growth, which was a bit deeper than expected, but a hit that won't be repeated in Q3. Meantime, consumer spending (+2.3%), housing (+1.3%) and government spending (+1.5%) all posted modest gains, again not exactly normal for a "recession". After two quarters of 1.8% a.r. declines, the GDP deflator rose at a 1.4% pace, as oil prices temporarily rebounded.

The 0.5% pop in June GDP was led by a comeback in oilsands production after notable weakness in earlier months. In fact, the mining and oil & gas sector accounted for almost half the monthly rise in GDP (jumping 3.1%), something that will not be repeated in coming months. Still, the rest of the economy did manage to post solid growth in the month, with broad-based gains in finance, wholesale and manufacturing. The Women's Soccer World Cup even provided a small kick (about 0.05%), as performing arts & spectator sports were up almost 15%, and will be replaced by the Pan Am games in the next monthly report.

"While far from good news, the decline in Q2 GDP was a bit less nasty than expected and the good news is that the economic contraction looks to be in the rear-view mirror. The big monthly gain in June GDP both breaks the five-month run of decline and likely means that Q3 growth will be positive as well, barring some huge surprise. However, even with some bounceback in Q3, the growth outlook for Canada remains modest at best, with almost all commodity sectors now struggling and manufacturing hardly steeping boldly into the breach", says BMO Economics.