Canada's Growth Slowed to 2% in Second Quarter, Weaker Than All Forecasts
Bank of Canada Governor Mark Carney
Tomohiro Ohsumi/Bloomberg
Overnight index swap rates declined following the report as pressure eased on Bank of Canada Governor Mark Carney, seen here, to raise interest rates next week.
Overnight index swap rates declined following the report as pressure eased on Bank of Canada Governor Mark Carney, seen here, to raise interest rates next week. Photographer: Tomohiro Ohsumi/Bloomberg
Canada’s economy grew at a slower- than-projected 2 percent rate in the second quarter, almost one- third the pace of the January-March period, amid a widening trade gap and slower household and government spending.
Ottawa-based Statistics Canada also cut its estimate for first-quarter growth in gross domestic product to 5.8 percent from an initially reported 6.1 percent. Economists predicted a 2.5 percent expansion in the second quarter, and the growth rate was weaker than all 18 forecasts gathered by Bloomberg News.
Overnight index swap rates and the Canadian dollar declined following the report as pressure eased on Bank of Canada Governor Mark Carney to raise interest rates next week. The Bank of Canada, the only central bank among Group of Seven nations to increase rates this year, had projected 3 percent growth in the second quarter.
“The market is probably right in assuming that the prospect of a hike has gone down a little bit,” said Eric Lascelles, chief economics and rates strategist with Toronto- Dominion Bank. “It’s still very much a contentious decision and I suppose this just confirms Canada has come down to earth.”
The U.S. Commerce Department last week revised its estimate of second quarter annualized growth to 1.6 percent, from an initial estimate of 2.4 percent.
Slower Spending
Canada’s economy is weakening in areas such as consumption and housing that had led it out of a recession last year, the government report showed. Consumer spending rose 0.7 percent in the second quarter from the first quarter, down from a first- quarter increase of 1 percent, on slowing purchases of home- related goods such as furniture. Housing investment growth was 0.3 percent, the slowest quarterly gain in five quarters.
Trade was a drag on growth for a second consecutive quarter, with a 3.9 percent increase in imports more than offsetting a 1.5 percent gain in exports, Statistics Canada said. Excluding trade, Canada’s final domestic demand increased 0.9 percent in the period, led by higher business investment.
“Momentum in growth has waned, but the report still signals a domestic economy that is in fairly good shape,” said Derek Holt, an economist at Bank of Nova Scotia’s Scotia Capital unit in Toronto.
Government stimulus measures also are slowing, with state spending contributing about 0.5 percentage point to the 2 percent annualized growth rate, its smallest contribution since the third quarter of 2008.
Government Spending
On a monthly basis, the economy grew 0.2 percent in June, led by manufacturing. The report matched the median of 17 estimates taken by Bloomberg News.
Canada’s dollar fell 0.4 percent to C$1.0638 per U.S. dollar at 11:35 a.m. in Toronto, compared with C$1.0601 yesterday. The rate on the three-month overnight index swap fell 1.4 percent to 0.876 percent. The rate measures what investors predict the central bank’s benchmark will average over that time.
“Today’s GDP numbers show that Canada’s economy is on the right track,” said Finance Minister Jim Flaherty in an e-mailed statement. “Our Economic Action Plan and our tax cuts are working.”
‘Right Track’
“Although Canada is experiencing some positive signs, the global economic recovery remains fragile,” Flaherty said. “Creating jobs and protecting Canada’s economic advantage remains our government’s top priority.”
The data suggest commodity companies such as Potash Corp. of Saskatchewan Inc., which faces a hostile takeover by BHP Billiton Ltd., and Suncor Energy Inc. helped offset the slowdown as they picked up investment spending. Business investment in plant and equipment expanded 3.5 percent in the second quarter, the largest quarterly gain since 2005. Businesses added C$12.7 billion ($12 billion) to their inventories during the quarter, more than double the C$5.6 billion accumulation in the first quarter, the report said.
The jump in business investment was led by commodity producers as the country benefited from rising demand for commodities from emerging economies such as India and China, helping it to recover from the slowdown better than other G-7 countries. Canada is the world’s second-biggest exporter of natural gas, and sits on the largest pool of oil reserves outside the Middle East.
Business Investment
Capital expenditure by commodity producers on the Standard & Poor’s/TSX Composite Index was up 43 percent from a year earlier in their latest quarterly filings, according to data compiled by Bloomberg News as of Aug. 27. Spending by oil and gas companies surged 58 percent and mining companies spent 12 percent more, accounting for almost all the expenditure growth.
Recent data also suggest the economy’s weakness has extended into the third quarter, with employment, trade, wholesale and retail sales reports over the past month failing to meet economist forecasts. Canadian existing home sales fell 6.8 percent in July on a seasonally adjusted basis following the introduction of a new sales tax in two provinces, and were down 30 percent from a year earlier, according to the Canadian Real Estate Association.
Real gross domestic income, a measure of the economy’s purchasing power, grew at an annualized pace of 2.2 percent in the second quarter, its slowest pace in a year and down from a pace of 8.3 percent in the first quarter.
The country’s terms of trade, a measure of export prices relative to import prices, was little changed from the previous quarter, the statistics agency said.
To contact the reporters on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net.
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