Canada's Economic Growth Back in the Plus Column

Daily Forex Fundamentals | Written by RBC Financial Group | Aug 29 08 14:14 GMT |

Canada's real GDP expanded at a marginal 0.3% annualized pace in the second quarter, weaker than expectations for a 0.6% annualized increase. This followed a downwardly revised first-quarter report with real GDP having contracted at a 0.8% annualized rate, faster than the preliminary report showing a 0.3% annualized dip. June's GDP was up 0.1% in line with market forecasts.

The key sources of strength were consumer spending (up 2.4% annualized) and inventories, which contributed 1.4 percentage points to growth in the quarter. Net exports clipped 2.8 percentage points from the quarterly growth rate and business capital investment trimmed 0.45 percentage points.

Canada's economy stalled in the first half of the year with second-quarter growth weighed down by a big drag from net exports and weaker gross fixed capital investment. Exports sank at a 5.9% annualized rate, while imports rallied back and posted a 2.3% annualized increase, a partial recovery from the 9% rate drop recorded in the first quarter.

Personal consumption spending moderated in the second quarter, recording a 2.4% annual rate increase. The slowing reflected a decline in motor vehicle purchases following two quarters of solid gains. Investment in residential structures posted the second consecutive decline with spending on renovations falling for the first time since 1999. Business cut back investment in machinery and equipment and non-residential structures in the quarter, but boosted inventories after the massive slowing in the first quarter.

Today's report confirmed that the economy grew at a mild pace in the second quarter, marking an improvement over the first quarter but still indicating limited momentum in the pace of activity. The slump in employment in July, moderating housing market activity and indications that growth in the U.S. economy may have already hit this year's high-water mark will leave the Bank of Canada with concerns about the downside risk to their projection that the economy will grow at about a 1.5% pace over the second half of this year.

On inflation, the GDP deflator increased at its fastest pace in 1982 in the second quarter, boosted by the high level of energy prices. This is in line with the run-up in the headline CPI inflation rate, which stood at 3.4% in July, above the upper end of the Bank's target band. Against this inflation backdrop, the Bank is unlikely to discount the upside risks to the inflation outlook until there are clearer signs that these elevated inflation readings will not fuel a pick-up in inflation expectations. Even with today's disappointing growth data, we do not expect the Bank of Canada to change the policy rate at next week's meeting but rather to maintain their position of "monitoring carefully the evolution of risks", both upside and downside.

RBC Financial Group
http://www.rbc.com

The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.