Real Canadian GDP growth accelerates above consensus expectations in Q2 2019

Real Canadian GDP rose 3.7 percent in the second quarter, coming above consensus expectations, as well as the Bank of Canada’s 2.3 percent forecast from July. Nominal GDP, which includes the effect of price changes, was up 8.3 percent, due in large part to a healthy rise in export prices.

The details were soft. Net trade led the way as exports grew 13.4 percent, aided by energy products, but also a sharp rise in aircraft shipments that has already waned from the monthly data. Imports shrank 4 percent on fairly widespread softness. Net trade contributed 5.5 percentage points to the economic growth. The other marked gainer was residential structure investment, rising 5.5 percent, breaking its five quarter streak of contraction as a recovery in resale activity was joined by growth in new builds and renovations.

Domestic demand remained quite weak, falling 0.7 percent in the second quarter. Household consumption rose 0.5 percent, held back by a contraction of spending on vehicles and, slightly surprisingly, non-durable goods. Non-residential investment dropped. Spending on machinery and equipment dropped 32 percent, not just because of an expected fall in aircraft spending after a solid first quarter, but more widespread softness including cars, industrial machinery, and electrical machinery. Non-residential structures spending also dropped, falling 1.8 percent for the sixth straight quarters of contraction.

Total employee compensation rose 6.9 percent, which together with the modest spending in the quarter, lifted the household saving rate up 0.4 points at 1.7 percent. Corporate income, as measured by the gross operating surplus, rose 15.8 percent, the fastest gain since 2016.

Economic activity rose 0.2 percent, with 17 of 20 major industries growing. On the contrary to the quarter as a whole, the details were encouraging. Manufacturing sector was the only weak spot, falling 1.4 percent.

“When it comes to the Bank of Canada's interest rate decision next week, they’re likely to have the same concerns with today's report that we have. Not only were today's details weak, but since the second quarter ended we've seen yet another escalation in the trade wars and associated uncertainty, alongside further weakness in the global growth backdrop and commodity prices. These will come to bear on the 2020 outlook via some degree of markdown. We expect next week's communication to lay the groundwork for a subsequent cut in October amid unresolved trade risks, which we believe will now be the case”, said TD Economics in a research report.