Canada’s Economy Unexpectedly Contracts in Second Quarter

The Canadian economy appeared to stall in the second quarter as investment in housing continued to fall, led by drop in new construction. The economy contracted at an annualized rate of 0.2% in the second quarter, Statistics Canada reported, far weaker than forecasters had expected.

The decline in the second quarter came as housing investment fell 2.1% to post its fifth consecutive quarterly decrease. New construction dropped 8.2% in the quarter, while renovation spending fell 4.3%.

The drop in spending came as Canadians face higher borrowing costs fuelled by interest rate hikes by the Bank of Canada, which is trying to bring inflation back to its target of 2%. Tu Nguyen, an economist with accounting and consultancy firm RSM Canada, said the cooling economy should be enough evidence for the central bank to forgo further rate hikes unless there is another major external shock that sends inflation upward. “The bank’s goal is eventually to restore price stability, to taper an overheated economy. Their goal is not to incur a recession. So it looks like the bank is achieving their goal,” she said.

“They’re certainly going to continue monitoring the data because there has been quite a lot of noise. The reason why I’m fairly confident that this is the end of it is we don’t expect spending to really go up towards the end of the year.”

Nguyen said this is the first time since the early days of the pandemic that spending on services did not grow, which she noted is a powerful signal of a cooling economy. This, despite household savings going up, suggests “people actually have more money in their pockets but they’re choosing to save it and not spend it because they’re anticipating a recession.”

The central bank raised its key interest rate by a quarter of a percentage point to 5% in July as it said it remained concerned that progress toward its 2% inflation target could stall. Nguyen predicted the Bank of Canada likely won’t cut rates until at least April 2024. “The bank needs to see sustained evidence of inflation going at least towards 2%. It probably won’t get to 2% until 2025 but it needs to stay below 3% for long enough,” she said. “If the bank cuts rates too early, it’s encouraging businesses and households to go out and borrow again, sort of heating up the economy again, and we really need a period of cooling down.”

Statistics Canada also revised its reading for growth in the first quarter to an annual pace of 2.6%, down from 3.1%.

“The surprise contraction in second-quarter GDP leaves little doubt that the Bank of Canada will keep interest rates unchanged next week,” wrote Stephen Brown, deputy chief North America economist for Capital Economics, in a note to clients. “With the fall in monthly GDP in June and the apparent stagnation in July setting a weak foundation for the third quarter, the Canadian economy may already have fallen into a modest recession.”

The weakness in the second quarter was also attributed to lower inventory accumulations, as well as slower growth in exports and household spending. Exports of goods and services crept up 0.1% in the second quarter compared with a 2.5% increase in the first quarter.

Growth in real household spending slowed to 0.1% in the second quarter compared with 1.2% in the first quarter. Meanwhile, business investment in non-residential structures gained 2.4% in the second quarter, boosted by a 3.3% gain in spending on engineering structures.

The overall pullback in the second quarter came as the economy contracted by 0.2% in June. Services-producing industries dropped 0.2% in June, while goods-producing industries contracted 0.4% for the month.

Statistics Canada also said its early estimate for July suggested real GDP was essentially unchanged for the month, though it cautioned the figure would be updated.

Source: Globe and Mail
Source: The Star
Source: Financial Post
Source: Statistics Canada

U.S Economic Growth for Last Quarter Is Revised Down to a 2.1% Annual Rate

The U.S. economy expanded at a 2.1% annual pace from April through June, showing continued resilience in the face of higher borrowing costs for consumers and businesses, the government said on August 30 in a downgrade from its initial estimate. The government had previously estimated that the economy expanded at a 2.4% annual rate last quarter.

The Commerce Department’s second estimate of growth last quarter marked a slight acceleration from a 2% annual growth rate from January through March. Though the economy has been slowed by the Federal Reserve’s strenuous drive to tame inflation with interest rate hikes, it has managed to keep expanding, with employers still hiring and consumers still spending.

The report on August 30 on the nation’s gross domestic product showed that growth in the second quarter was driven by upticks in consumer spending, business investment and outlays by state and local governments. A measure of consumer prices in the report also showed inflation cooling, which could ease the pressure on the Fed to further raise interest rates. “Lower growth and weaker increases in prices are good news for the Federal Reserve,” said Eugenio Aleman, chief economist at Raymond James.

Consumer spending, which accounts for about 70% of the U.S. economy, rose at a 1.7% annual pace in the April-June quarter – a decent gain, though down from 4.2% in the first three months of 2023. Excluding housing, business investment rose at a strong 6.1% annual rate in the second quarter. Investment in housing, hurt by higher mortgage rates, fell in the second quarter.

The American economy has proved surprisingly durable in the midst of the Fed’s aggressive campaign to stamp out a resurgence of inflation, which hit a four-decade high in 2022. Since March 2022, the Fed has raised its benchmark rate 11 times, making borrowing for everything from cars to homes to business expansions much more expensive and prompting widespread predictions of a coming recession.

Since peaking at 9.1% in June 2022, year-over-year inflation has fallen more or less steadily. In July 2023, it came in at 3.2% – a significant improvement though still above the Fed’s 2% inflation target. Excluding volatile food and energy costs, so-called core inflation in July matched the smallest monthly rise in nearly two years.

One measure of prices in the GDP report – the personal consumption expenditures index – rose at a 2.5% annual rate in the second quarter, down from a 4.1% pace in the January-March quarter and the smallest increase since the end of 2020.

Since the Fed began raising rates, the economy has been bolstered by a consistently healthy job market. Employers have added a robust average of 258,000 jobs a month in 2023, though that average has slowed over the past three months to 218,000.

On August 29, a report from the government added to evidence that the job market is gradually weakening: It showed that employers posted far fewer job openings in July and that the number of people who quit their jobs tumbled for a second straight month. (When fewer people quit their jobs, it typically suggests that they aren’t as confident in finding a new one.)

Still, job openings remain well above their pre-pandemic levels. The nation’s unemployment rate, at 3.5%, is still barely above a half-decade low. And when the government issues the August jobs report on September 1, economists polled by the data firm FactSet think it will show that while hiring slowed, employers still added 170,000 jobs.

The combination of tumbling inflation, continued economic growth and slower but steady hiring has raised hopes for a rare “soft landing.” That’s a scenario in which the Fed manages to conquer high inflation without causing a painful recession.

Source: Globe and Mail