What propelled Canada’s economy to Q2 gains

A surge in exports of energy, aircraft and pharmaceutical products helped propel Canada’s economy higher in the second quarter of this year, Statistics Canada said Thursday.

The economy rocketed to an annualized pace of 2.9% in the period from April 1 through June 30, compared with a slightly revised annual pace of 1.4% in the first three months of 2018, the agency said.

Economists had expected an annualized pace of 3% for the second quarter, according to Thomson Reuters Eikon.

Statistics Canada said the sharp hike in growth was mainly the result of higher exports, which saw an increase of 2.9% in the quarter.

That was the highest growth rate for that category in four years, led by energy exports, which accelerated at a rate of 5.6%.

Exports of goods were 6.3% higher in the second quarter, driven particularly by pharmaceuticals while exports of aircraft, aircraft parts and engines grew by 13.4%.

Service exports edged 0.2% lower.

Imports, meanwhile, were higher by 1.6%, faster than the 1% growth rate recorded in the first quarter. Statistics Canada said much of that growth was a result of higher refined energy imports to offset an expected shutdown of four Canadian refineries in April and May.

Household spending was also higher, up 0.6% in the second quarter, compared with the 0.3% growth seen in the first three months of the year.

The increase was mainly a result of higher bills for utilities including water, electricity and gas, and because households were spending more for services such as renovations, up 0.8%.

Housing investment rebounded in the second quarter, up 0.3% compared with a revised 2.7% drop in the previous three-month period. But spending on home ownership transfer costs and new construction was lower.

Business capital investment was higher by 0.4%, but that was the slowest pace of growth seen in the segment since the fourth quarter of 2016 and largely the result of a slowdown in purchases of machinery and equipment.

While today’s GDP news is positive, economists don’t expect unbridled economic expansion from here.

“The economy was speeding ahead in the second quarter, but don’t take that as a sign of things to come,” said CIBC director and senior economist Royce Mendes in a research note. “The reading was a rebound from a sluggish first quarter, and the monthly GDP print for June suggests there was little momentum heading into Q3.” 

As well, Mendes doesn’t expect the Bank of Canada to rush a rate hike next week. Rather, he predicts it “will take the extra six weeks to monitor incoming data and make sure Canada-US negotiations don’t fly off the rails.” 

National Bank managing director and senior economist Krishen Rangasamy is encouraged by both the “solid increase for nominal GDP” and the “continued recovery of business investment.”

Yet, he also warned in his commentary not to “expect another spectacular quarterly GDP growth print in Q3.” Exports could be slower after the implementation of U.S. aluminum and steel tariffs, he said, and oil and gas could also decline.

Rangasamy also doesn’t expect the GDP numbers “to hasten the central bank into tightening monetary policy.”

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