Canadian GDP rose 4.5% in the second quarter (Q/Q, SAAR), marking a fourth straight quarter of robust growth. Price growth was negative, driven by a decline in the terms of trade. As such, nominal GDP, which includes these impacts, was up by a more modest 2.9%.
The stars of the show were again Canadian consumers, as household spending rose 4.6%, assisted by another quarter of robust spending on durable goods (+9.4%). Rising household income on the back of healthy job gains helped support growth, and was sufficient to bring the household savings rate up a notch, to 4.6% (from 4.3% in Q1).
Non-residential investment pulled forward again, with structures and equipment investment up 7.1%, and intellectual property investment up 8.7%. Government fixed investment was somewhat soft, rising just 0.5%.
Residential investment pulled back, down 4.7% in the second quarter, given a sizeable (-24.1%) drop in ownership transfer costs which reflected the cooling off of resale activity in key housing markets.
Net trade swung back to a positive contribution, as export growth (+9.6%) outpaced imports (+7.4%)
Perhaps most encouraging was the monthly GDP report for June, where 14 of 20 major industries expanded, generating a 0.3% month-on-month gain. It was the goods-producing side of the economy that again led the way, rising 0.5% on robust (+2.0%) gains in construction. For services, it was again slow and steady, up 0.2% on relatively broad-based gains.
Key Implications
Wow. There seems to be no stopping Canada of late, as above-expected growth in Q2 led to the best four-quarter growth performance since 2006. And while it was once again consumers in the driver’s seat, another strong quarter of income growth meant that households were able to increase their savings rate a touch while still keeping their wallets open.
What’s more, while it appears unlikely that another quarter of 4%+ growth is in store any time soon, the solid monthly data for June suggests that Canada still had solid momentum heading into the summer months, with very early tracking suggesting that Q3 growth could be around 2.5% – a solid pace by any measure and one likely to push Canada into excess demand territory.
For the Bank of Canada, another interest rate hike this fall is almost certainly a done deal. With the economy continuing to run well above its potential pace, and economic slack likely non-existent at present, Poloz will be reassured that inflationary pressures are nascent. That said, our research suggests that even with the robust growth of late, inflation is likely to remain modest relative to past experience (see report).
