The Canadian economy posted strong growth in the second quarter, but there are growing signs of a slowdown as consumers grapple with high inflation and rising interest rates. Real gross domestic product lagged in May, which was better than the initial estimate of a 0.2 per cent drop, Statistics Canada said in a report on Friday. The economy grew 0.1 percent in June, according to a preliminary estimate. Thanks to stronger growth in April, Canada’s economy is on track to grow 1.1 percent in the second quarter, or an annualized rate of 4.6 percent. For financial analysts on Bay Street, the report was mixed. Economic growth in the April-June period was stronger than the Bank of Canada’s forecast of 4%. It was also markedly better than in the United States, which has seen two consecutive quarters of falling GDP, sparking intense debate over whether the country is in recession. On the other hand, recent months have seen sluggish growth in Canada. Consumer and business confidence is falling. The real estate industry has frozen. And some high-profile tech companies — like Shopify Inc. – they announce layoffs. Canada’s labor shortage is the country’s biggest economic threat 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. In addition, he noted that Canada’s economic recovery from COVID-19 has lagged behind the pace of the US, and therefore Canada’s better fortunes of late are not as impressive as they seem. “The fact that we’re already seeing a slowdown is a bit worrying,” Mr Brown said. “We’re quite bullish on the outlook for Canada, just because of the housing sector, but it looks like we have more weakness elsewhere than expected.” Despite the shift, the Bank of Canada is widely expected to continue raising interest rates as it tries to reduce inflation that is nearing a four-decade high. The bank raised its policy rate to 2.5 percent from a pandemic low of 0.25 percent in less than five months. “The Bank of Canada is still expected to deliver a further, 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 incomes of high inflation and rising interest rates to begin to show more broadly in the financial data for the second half of the year, allowing the Bank of Canada to pause with rates just above 3 per cent. .” Friday’s report showed a split between the goods and services sides of 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% in May. Despite the well-known headaches at major airports, the economic performance in air transport increased by 14.1%. The hospitality sector also grew by 1.9%, its fourth consecutive month of growth. Restaurant sales rose quickly this spring despite sticker shock on menus. The goods side was undoubtedly weaker. Real GDP fell 1.7 percent in manufacturing, the first decline in eight months. Statscan said auto production was hampered by a prolonged shortage of semiconductors, in addition to renovations at some assembly plants. Output fell 1.6 percent in construction, the sector’s second straight monthly decline. Statscan noted that many of Ontario’s unionized construction workers were on strike in May, leading to delays on various projects. Homebuilding fell in May, but activity was 11% higher than at the start of the pandemic. “We’re seeing a downturn in renovations and improvements, which is tied to the housing market,” Mr. Brown said. “Obviously, to the extent that fewer investors are returning homes, that means they will invest less money in improving them.” Mr. Brown also pointed to sales of pre-fab homes in Toronto, which have fallen sharply. “This suggests that we’re going to see a housing downturn start in the second half of the year, just because so many developers are relying on these pre-construction sales to get seed funding.” The outlook for Canada’s economy is bleak. Recession fears are growing, although few economists predict a lasting recession. The Bank of Canada predicts growth will slow to an annual rate of 2% in the third quarter. It also expects the economy to grow by 1.8 percent in 2023 – a sharp downgrade from 3.2 percent in an earlier forecast. “On balance, we expect growth to fall mainly in the second half to below the 1 per cent annual clip, a notable deceleration, albeit firmer than U.S. trends,” Bank of Montreal chief economist Doug Porter wrote in a research note . The country, he added, “cannot completely avoid the pull of the slowdown in the American economy and the Bank of Canada’s aggressive rate hike campaign.” Your time is valuable. Deliver the Top Business Headlines newsletter to your inbox morning or night. Sign up today.
