• Negligible economic growth of 0.3% in Q2 after revised 0.8% decline in Q1
• Exports continue to subtract from growth, offset by a rebound in business inventories
• Domestic demand cooling

After shrinking by 0.8% annualized (revised down from -0.3% previously) in the first quarter, the Canadian economy managed to skirt the technical definition of a recession by growing a modest 0.3%. Unfortunately, there wasn’t much else good we could find to say about it. The Canadian economy is still smaller than it was in the fourth quarter of 2007 and only 0.7% ahead of its position a full year ago. Once again, the weakness was concentrated firmly in the export sector, which subtracted over 2 percentage points from total GDP growth in the quarter. The domestic side of the economy maintained some strength with personal consumption growing by 2.4% and final domestic demand maintaining a pace above 2.0%.

As if to add insult to injury, the Canadian GDP report arrives on the heals of a resounding 3.3% increase in U.S. GDP in the same time period. Canadians who have been hearing of the impending U.S. doom for much of the last year must be shaking their heads – how could we be doing so much worse than our counterparts to the south? Keep in mind that a fair amount of the increase in the U.S. is attributable to the economic stimulus checks, which managed to keep personal consumption growth positive. But it is also due to polar opposite results in each country’s trade sectors. Canadian exports, which make up a much larger share of the Canadian economy than in the U.S. (37% vs. 13%) , have fallen in each of the last three quarters, whereas the falling U.S. dollar has increased the competitiveness of U.S. exports, culminating in a 1.7 percentage point contribution to GDP in the second quarter - the mirror opposite of the Canadian position.

While the domestic side of the Canadian economy has continued to outperform the U.S. and this will likely continue through the course of this year, it too will slow from its recent highs. Fed by strong income and employment gains, growth in personal consumption has been running at a pace above 3% for well over the past two years. With job growth slowing and income growth soon to follow, the days of the spendthrift Canadian consumer are quickly coming to a close. Moreover, the Canadian housing market is no longer the driving force it once was and subtracted from economic growth for a second straight quarter. With weakness on the export side to continue through the remainder of this year and the domestic side showing signs of moderating, the Canadian economy is likely to grow at an annual rate below 1%. This will surely be on the mind of the Bank of Canada when they meet next week to make their interest rate decision. While we continue to believe they will keep the overnight rate at 3.0%, we also expect the Bank to acknowledge that the Canadian economy is performing significantly worse than outlined in their latest Monetary Policy Report.

James Marple, Economist
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