Canada posts strong quarterly growth, but trade risks loom

OTTAWA — The Canadian economy beat expectations in the second quarter with its strongest quarterly stretch of growth in two years, according to a report by Statistics Canada.

The details, however, were less encouraging, many experts said.

The economy expanded at an annualized pace of 3.7% in the second quarter – thanks in large part to a 3.7% rebound in goods exports and a 1% drop in import volumes.

For many analysts, Canada’s trade-driven boost was likely a temporary factor, particularly at a time of weakening global economic conditions.

“That clearly is not sustainable going forward, even without considering growing external headwinds from the U.S.-China trade war, Brexit uncertainty, headwinds from slower global growth,” said Nathan Janzen, senior economist for RBC Economics Research.

“But, I think, on balance you can still say that the economy looks like it was doing OK over the first half of the year.”

Overall, the reading showed a solid turnaround for an economy coming off its weakest back-to-back quarters of growth since 2015. It also marked Canada’s fastest pace of growth since a 4.4% reading in the second quarter of 2017.

Exports of energy products grew 5.9% after posting a three per cent decline in the first quarter, farm and fishing products expanded 15.2% following a 8.4% contraction and non-metallic minerals rose 19% for their strongest quarter in almost three years.

The headline GDP number was also supported by the 1% drop in import volumes, compared with a 2.1% increase in the first quarter.

Forecasts had pointed to a more modest rebound after the economy experienced a sudden deceleration over the winter caused in large part by a sharp decrease in oil prices.

Economists had expected growth at an annualized rate of three per cent for the second quarter, according to the financial markets data firm Refinitiv.

The Bank of Canada had projected second-quarter growth of 2.3%.

Outside of Canada, there’s mounting evidence of slowing global growth – mostly a consequence of the deepening US-China trade war. The central bank will be forced to consider the trade-related concerns next Wednesday when it delivers its latest interest-rate announcement.

“For the (Bank of Canada), the huge quarter is well above their forecast, but the risks to the outlook remain on the downside,” Benjamin Reitzes of BMO Capital Markets wrote in a report.

“Given the details of the report and domestic demand falling in three of the past four quarters, the bank will likely still sound more cautious next week.”

The global environment has dimmed since the central bank’s most recent public comments in early July. At the time, it underlined the resilience of the domestic economy and appeared to be in no hurry to adjust its policy, even as other central banks were poised to lower rates in response to the already darkening international outlook.

“Definitely it won’t ease any concerns about a deteriorating external growth backdrop,” Janzen said of the GDP report.

He added that RBC still doesn’t expect governor Stephen Poloz to lower interest rates next week, but he noted the risks are tilting towards the possibility of a cut in the coming months.

Stephen Brown, senior Canada economist for Capital Economics, wrote in a research note that, given the downside risks, it’s maintaining its earlier call that Poloz will lower interest rates in October. Brown said the second-quarter GDP boost was supported by “temporary factors.”

The Statistics Canada report showed housing investment expanded 1.4% following five-consecutive quarters of declines. Business investment declined 4.3% after a posting 3.4% increase in the first three months of 2019, while household spending slowed to 0.1%, down from 0.7% growth in the previous quarter.

Statistics Canada also revised its first-quarter growth number to 0.5 per cent, up slightly from the initial reading of 0.4%.

On a month-to-month basis, the report said the economy expanded 0.2% in June – Canada’s fourth-straight month of growth. It said the Toronto Raptors’ NBA championship run that month coincided with growth for restaurants, bars and the category covering sporting goods, hobby, book and music stores.