July 29, 2022 | 09:09
Cdn. GDP: The Artful Recession Dodger
Canadian real GDP was flat in May, a better-than-expected outcome than the flash estimate of a 0.2% drop. Perhaps the more notable news today was StatCan's preliminary take for June, where it sees the economy eking out a 0.1% gain. Even with the relatively listless May/June performance, the early estimate for all of Q2 growth was a solid 1.1% gain, or roughly 4.5% annualized, which is a tad better than we and the Bank of Canada had penciled in for the quarter (both were 4.0%). While growth is now clearly simmering down rapidly after the big bounceback, it compares very favourably to U.S. trends. For example, while U.S. GDP fell at an annualized pace of 1.25% in the first two quarters of the year, Canada was busy rising at roughly a 3.75% clip, fully 5 percentage points north. Suffice it to say, recession really can't be in the conversation for Canada, at least not looking in the rear-view mirror at the first half of the year.
For May, there was an amazingly clear split between widespread strength in service sectors—amid a more complete reopening in travel and entertainment industries—and a big pullback in goods. The latter was pulled down by a 1.7% drop in manufacturing (with a whopping 21% plunge in motor vehicle production), and a 1.6% pullback in construction (weighed down by a strike in Ontario). The early read on June points to a rebound in both. Meantime, the solid 0.4% rise in services was led by a 14.1% pop in air transportation (and thus airport chaos), and further gains in hospitality sectors. On the latter, the accommodation & food services industry rose 1.9% and a massive 59.5% y/y, while arts, entertainment & recreation rose 2.6% and a huge 79.1% y/y.
Looking ahead, much of the reopening catch-up play is now baked in the Canadian data, and we look for a little less separation with the U.S. growth trend ahead. However, Canada still has a little further to go on that front, and also has the big relative benefit of its outsized commodity weighting. Even with a dip in May, the resources sector is still up 8.9% y/y, while agriculture is on course for a big rebound after last year's drought. These positives will be partially offset by Canada's much heavier reliance on housing—and its deep correction is beginning to weigh broadly. On balance, we look for growth to cool notably in the second half to below a 1% annualized clip, a marked slowdown, albeit firmer than U.S. trends.
Bottom Line: This is generally a slightly better than expected performance by the Canadian economy through the late spring and early summer, and confirms that GDP rose by a bit above a solid 4% pace in Q2. However, growth can't fully avoid the pull of a slowing U.S. economy and the Bank of Canada's aggressive rate hike campaign, and we look for much cooler trends in coming quarters.