September 01, 2023 | 09:11
Cdn GDP: Slow Times at Summertime's High
Canada's economy slowed notably after a fast start to 2023, as a series of challenging events through the spring and early summer weighed heavily on activity. Real GDP surprisingly dipped at a modest 0.2% annual rate in Q2 (consensus was looking for a 1.2% rise), down from +2.6% in Q1 (revised lower from 3.1%). And, the latest monthly results suggest activity will remain sluggish in Q3—June GDP fell 0.2% (as foreshadowed by the flash estimate), while the July flash is for a flat reading. For reference, the Bank of Canada had pencilled in 1.5% growth for both Q2 and Q3 in its July forecasts, so activity is coming in far on the low side of official expectations (our early read on Q3 is barely positive, say +0.5%). The small pullback in Q2 GDP lines up well with the recent rise in the unemployment rate, and reinforces the point that growth is cooling markedly, even when looking through the many special factors in recent months.
Starting with the weak Q2 figure, the details were on the soft side as well, with consumer spending rising just 0.2% a.r. , following a 4.7% Q1 advance. Note that the Q1 figure was revised down a full percentage point, and that previous 5.7% result had seemingly caused the BoC much angst, and may have been a prime factor behind the renewed rate hikes in June/July. Well, no need for angst that the consumer is still too strong, as real spending is now up just 1.6% y/y, compared with population growth of more than 3%. Also on the soft side, housing activity fell 8.2%, the fifth straight quarterly decline. On the plus side, business investment was solid at +10.3%, with both M&E and structures solid. Net exports dragged 0.5 ppts, which was a bit less expected, but inventories were an unanticipated drag, cutting 0.8 ppts from headline growth. Final domestic demand was +1%, and is only up 0.4% y/y, highlighting slowing domestic momentum.
One silver lining for the outlook is that income growth remained very strong, with wages & salaries up 9.1%! Disposable income surged 10.7%. Combined with the slowdown in spending growth, that pushed the savings rate up to 5.1%. That's back to what we believe is a sustainable savings rate, given today's inflation and interest rate backdrop. There's still some ability to spend, but clearly consumers turned more cautious in Q2 and may have stayed that way in Q3.
Turning to the monthlies, June's 0.2% pullback was in line with the flash estimate, with the weakness spread across both goods (-0.4%), and services (-0.2%). Most industries were negative in the month (see second table below). The flat flash estimate for July was likely affected by the on-off B.C. port strike. This combination gives a weak handoff and a soft start to Q3. In stark contrast to the U.S. economy—where the debate is seemingly over whether it will be a soft landing or a no landing—it looks like Canada is already having a bit of a bumpy landing.
Bottom Line: We are sticking to our view that Canada will experience a mild contraction, and today's surprisingly soft Q2 obviously makes that outcome much more likely. The broad softening in the domestic economy will almost certainly move the BoC to the sidelines at next week's rate decision after back-to-back hikes. Between the half-point rise in the unemployment rate, the marked slowing in GDP, and some cooling in core inflation, it now looks like rate hikes are over and done. Now, the Bank of Canada just has to be patient as they wait for inflation to come their way—but that could take some time, especially with oil prices backing up again.