August 31, 2022 | 09:41
Cdn GDP: One Last Reopening Gasp
Canadian real GDP rose at a 3.3% annual rate in Q2, more than 1 percentage point short of expectations but still a staggeringly different outcome than the 0.6% pullback reported for the U.S. economy in the same quarter. The key driver? There was one last re-opening bounce for the economy, as consumer spending roared at a 9.7% annualized clip in the spring quarter, paced by a 16.3% jump in services as pent-up demand for travel and entertainment was unleashed. On the flip side, the drag from housing was heavier than expected, with residential construction plunging 27.6% a.r. (and more where that came from on the way). Government spending was down (for a change), while net trade subtracted a hefty 5.2 ppts from GDP (about 1 ppt more than expected). Countering that, the surge in imports rebuilt depleted stocks, and inventories added 5.9 ppts to GDP. Final domestic demand was solid at +2.9% a.r., led by the consumer surge but with an assist from business spending.
While the headline real GDP figure may have been a tad softer than heady expectations in Q2, nominal GDP (i.e., the amount of dollars actually spent) was on an absolute rampage. Paced by the largest quarterly rise in the GDP deflator (14.0%) since 1974—or when Richard Nixon was still President—nominal GDP rose at a blistering 17.9% annual rate in the quarter. Aside from the pandemic bounce in 2020Q3, that's the largest quarterly rise in economy-wide spending since 1981. Recall that nominal GDP drives things like personal income, corporate profits and government revenues. Given this burst in nominal spending and income, it's little wonder that a wide variety of provinces and Ottawa are suddenly reporting budget surpluses. For a Bank of Canada that is laser-focussed on inflation, the moderate miss in real GDP is almost meaningless when nominal spending is barreling ahead at deep into double-digit terrain.
On the monthly figures, June GDP was +0.1%, unchanged from the flash estimate (but a bit below our expectation) with mixed performance among industries. There was a further rebound in hospitality, but finance dropped for a third straight month. The flash estimate for July GDP is -0.1%, not a great start to Q3, but that stumble was largely expected after a wave of disappointing preliminary July results. We'll be watching to see if that softness becomes a trend in August, kicking off with next Friday's jobs data.
One sidebar on the quarterly results was a further dip in the household saving rate to 6.5% in Q2. That's still well above the pre-pandemic norm of below 3%, but is down from 9.5% in Q1 and last year's average of 11.2%. It's possible the rate is now closer to a new-normal—after all, a higher inflation rate would normally be associated with a higher saving rate (as rising prices dig into savings). Even so, we still believe that the build-up of savings over the past 10 quarters leaves many households with considerable spending firepower.
Bottom Line: While headline real growth landed shy of the BoC's most recent forecast of 4%, the overwhelming power in nominal GDP growth will keep them squarely on the tightening track. We now look for a 75 bp hike next week, with an outside chance of a larger move (a la their July 100 bp surprise). For the forecast, the moderate downside miss in Q2 (and with no net revisions to prior quarters) cuts our full-year estimate by two ticks to a still-sturdy 3.2% growth rate. However, we are maintaining our view that GDP growth will cool further to just 1.0% in 2023—while we're not in the recession camp, that's just a negative shock away.