Canada’s economic growth shrinks in Q2, likely to pick up in Q3

The Canadian economy contracted in the second quarter of 2016, broadly consistent with expectations. The country’s real GDP fell at an annual rate of 1.6 percent, in line with market projections of 1.5 percent decline, but slightly larger than the Bank of Canada’s forecast of a 1 percent contraction. If it were not for the effect of the Fort McMurray wildfires, the Canadian economy would have grown around 0.4 percent in the second quarter, according to Statistics Canada. Nominal GDP dropped by a more modest 0.2 percent, thanks to improved oil prices.

Exports have been falling following a robust start to 2016, as seen by the almost 17 percent decline in the second quarter. However, domestic demand continued to be resilient. Consumer spending remained strong, while drop in business investment was slower than anticipated, said TD Economics in a research note.

Furthermore, the June data indicated that the impact of the wildfires on oil production has already started to reverse and this is likely to continue into the summer months. Moreover, recommencement of auto production following the earlier supply disruptions is also underpinning economic growth. Also supporting the growth are strong manufacturing order books and the beginning of the new Canada Child Benefit payments in July. These factors indicate towards growth in the third quarter, according to TD Economics.

After the near-term noise passes, the rate of economic growth is expected to be lukewarm. This shows several economic headwinds, including increase in household indebtedness, an aging population, and the current economic rotation process.

Looking at the positive side of the second quarter report, the overall consumption rose 2.8 percent. Government spending was higher, leading the overall consumption, as attempts related to the Fort McMurray wildfires resulted in a rise of 4.2 percent. Household spending rose 2.2 percent, thanks to strong rise in services spending and nondurable goods. Residential investment growth continued to be positive too, rising 1.2 percent.

The monthly GDP for June came in at 0.6 percent month-on-month, driven by an improvement in oil and gas extraction as production came back on line after the wildfires. Manufacturing output grew 1.8 percent, partially reversing May’s losses.