October 01, 2021 | 09:13
Cdn. GDP—When Bad News is Good
Canadian real GDP fell 0.1% in July, but that's notably milder than the initial StatCan flash estimate of a 0.4% drop, and even a bit better than the consensus call for a 0.2% fall. Perhaps more importantly, the flash estimate of August points to a nice 0.7% advance. Combined, the solid August rise and the upward revision to July puts a solid foundation under Q3 growth as a whole. Following the deeply disappointing 1.1% annualized setback in Q2, we continue to look for a moderate comeback in Q3 to around 3.5% growth. Yes, even with today's report, we are not revising our estimate, as we were anticipating a quick rebound from the temporary July dip in activity. And, we look for growth to pick up further in Q4 to around a 6% pace, leaving growth for the full year at 5%.
The details of July's small decline are almost the polar opposite of the early stages of the recovery. That is, while services saw solid gains—led by a 12.5% pop in hotels & restaurants—the goods-producing sectors were walloped. And the weakness was not in the usual suspects. Utilities plunged 4.9% in the month, as populous central Canada had a cool summer. Meantime, weather was anything but cool in the West, and the agriculture sector has been pounded by drought, cutting crop & animal production 6.6% m/m, and 15.6% y/y. However, manufacturing was also weak (-1.1%), still grappling with a multitude of supply chain challenges, and construction also fell 0.9% m/m.
While no specifics are yet available for August, the re-opening sectors are expected to make another solid contribution, manufacturing looks to have rebounded, and retail is also pointing to gains. However, the weakness in agriculture output looks to persist—that's a big turnaround for one of the few sectors that managed to post solid growth in traumatic 2020.
Bottom Line: Today's GDP report provides a small tonic to the troubling results from a month ago. The slightly smaller-than-expected setback in July and nice pop in August suggest that the economy managed to grind out some moderate growth in the summer quarter as a whole. We continue to expect Q3 to print growth of around 3.5%. While that's not enough to alone turn the dial for policy, it reinforces the view that the Bank will take another tapering step at their policy meeting later this month (Oct 27). Finally, even with the anticipated bounce in August activity, GDP in that month would still be roughly 1.2% below the pre-pandemic peak—there's still more wood to chop.