- GDP increased 3.7% (annualized) in Q2
- Details were less encouraging – business investment declined, household spending growth was soft
- Industry GDP details were better with solid growth in ‘non-commodity’ industries.
The stronger-than-expected Q2 increase was entirely due to a huge 5.4 percentage point add to growth from net trade. That more-than-reversed a big drag from net trade in Q1 – and is clearly unsustainable going forward, even without considering growing external headwinds from slower global growth, an escalating US-China trade war, Brexit uncertainty, etc. ‘Final domestic demand’ declined in Q2 as consumer spending growth slowed and business investment declined.
Still, the quarterly GDP numbers are often volatile, and surprisingly soft details from the Q2 report followed surprisingly strong details in Q1 (when final domestic demand jumped 3.2% and net exports were weak.) Some special factors were at play – a big pullback in equipment investment in Q2 was in large part due to the reversal of a large increase in Q1 aircraft imports that boosted investment, and lowered net trade, in Q1. And other Canadian data has been generally stronger than feared year-to-date. Employment increased by almost 250k over the first 6 months of the year and wage growth strengthened in Q2. Foreign direct investment inflows surprisingly had the strongest first half of a year in 2019 since 2013 despite ongoing Canadian competitiveness concerns. And the ‘GDP-by-industry’ breakdown showed a strong (almost 3%) jump in ‘non-commodity’ industry output, mostly services, in Q2. It is difficult to square that increase with the expenditure add-up that saw the vast majority of growth coming from exports of goods.
From the Bank of Canada’s perspective, though, the Q2 report will do nothing to alleviate concerns that an increasingly uncertain external growth backdrop will slow the Canadian economy going forward. We continue to expect the Canadian central bank will follow other global peers with a rate cut. Probably not at next week’s policy decision but with the risks tilted to an earlier cut than the Q1-2020 move we have in our current base case.
