The Canadian economy expanded by 3.3% quarter/quarter annualized (q/q) in Q2 2022. Meanwhile, the flash estimate for July showed a 0.1% month/month (m/m) drop in GDP.
Spending by households increased by 9.7% q/q annualized. Statistics Canada noted that this was “driven by spending on garments and footwear, household spending on semi-durable goods rose 5.6% in the second quarter.” They also stated that “the increase was largely attributable to increased travel and many people returning to the office.”
The report noted that “the opening of the economy also boosted outlays for services (+3.9%) in the second quarter—the eighth consecutive quarterly increase.” The major contributors were travel abroad, food and non-alcoholic beverage services, air transport, alcoholic beverage services, games of chance, and accommodation services.”
Gross capital formation declined 9.0% q/q annualized, driven by a 27.6% drop in residential structures following the Bank of Canada’s move to more aggressive policy rate hikes. On the opposite side, investment in non-residential structures and machinery and equipment rose 13.9% q/q annualized. Statistics Canada noted, “with projects such as Kitimat Liquified Natural Gas in British Columbia and higher capital spending in oil and gas in Alberta, businesses continued to invest in engineering structures in the second quarter.”
Business investment in inventories was a big driver, contributing 1.5% to GDP. The report stated that “non-farm inventory investment was bolstered mainly by increases in wholesale durables (machinery and building supplies), non-durables (fertilizers), and manufacturing durables (machinery and aircraft)”.
Key Implications
Canada’s economic outperformance continues. With GDP figures around the world raising recession fears, Canada’s data are still looking pretty good. At 3.3% q/q annualized, this is the fourth straight quarter of above trend economic growth. Though the inventory build was the biggest contributor to growth, the contribution coming from Canadian consumers points to still strong underlying fundamentals.
Looking forward, the July flash estimate of -0.1% m/m is reflective of a deceleration that was always expected now that the economy has reached beyond full capacity. Not to mention, the impact of high inflation and the BoC’s surprise 1% rate hike in July are starting to have an impact. We are already seeing this in residential investment but are expecting a greater impact on the consumer going forward. Given our expectation that the BoC will continue to raise rates at an aggressive pace next week, a slowing to below trend growth for Q3 is in the cards.
