Highlights:
- Canadian Q2/18 GDP growth rose to 2.9% from 1.4% in Q1. The Q2 gain was marginally below market expectations of a 3.1% increase though slightly above the Bank of Canada’s forecasted 2.8% gain.
- Q2 GDP strength largely reflected both exports rising an annualized 12.3% after increasing only 2.4% in Q2 along with a strengthening in consumer spending growth to 2.6% from 1.0% in Q1.
- The bounce in consumer spending contributed to domestic demand rising 2.1% from a 1.7% Q1 increase with the gain restrained by residential and business investment rising 1.1% and 1.9%, respectively.
Our Take:
As expected, Canadian Q2 GDP growth strengthened to an annualized 2.9% up from the disappointing 1.4% gain in Q1. The strengthening largely reflected a rebound in exports along with some strengthening in consumer spending. Both areas had been negatively impacted by adverse winter weather in the first quarter with these pressures easing in Q2. The wage measures in today’s GDP report, along with the separate May ‘SEPH’ employment earnings numbers also out this morning, point to the Bank of Canada’s ‘wage-common’ measure rising 2.4% in Q2 little changed from the increase in the first quarter. There had been speculation that economic conditions remained sufficiently robust to prompt the Bank of Canada hiking the overnight rate as early as the upcoming policy meeting next Wednesday. This expectation had been abetted further by guarded optimism that a re-negotiated NAFTA deal was close at hand. However, this morning’s Q2 GDP report likely tempered those expectations as it was only slightly above the 2.8% the Bank of Canada had assumed in its latest forecast released in April. As well, the wage data do not imply an imminent threat to the central bank’s 2% inflation target. With respect to NAFTA developments, Bank of Canada actions are expected to be more guided by how businesses eventually respond to whatever emerges from the negotiations. Economic conditions in our view likely remain sufficiently strong to warrant further tightening though at a measured pace. Thus our expectation is that the overnight rate will likely rise 25 basis points before the end of the year though more likely in October rather than next week’s policy meeting.
