E-sight August 31: Canada delivers strong growth in Q2 before sharp slowdown in second half of 2022

The Canadian economy grew by an annualized 3.3 per cent in Q2 2022 – a strong gain but short of financial market expectations for an increase of 4.4 per cent. The details of the report were robust. Consumer expenditure was remarkably strong, with an increase of 9.7 per cent that Statistics Canada attributed to travel and to the return of workers to the office. Investment declined 9.0 per cent annualized in the second quarter, reflecting a 28 per cent drop in residential structures. This coincides with a correction in the resale residential market that was triggered by the rapid tightening of monetary policy by the Bank of Canada. In contrast, business investment increased by 13.9 per cent in the quarter. Inventory accumulation was substantial at $47 billion, adding 1.5 percentage points to GDP. International trade was a drag on economic growth, with import volumes rising 6.9 per cent, far outpacing a 2.6 per cent increase in export volumes.   

Overall, the Canadian economy put in a robust showing in the first half of 2022, with growth of 3.1 per cent in Q1 and 3.3 per cent in Q2. However, the cracks are starting to show. The impact of higher interest rates is starting to be felt and the headwinds on the economy will continue to increase in the coming months. The large inventory accumulation in Q2 could weigh on economic growth in the second half of this year if firms elect to meet sales with existing stocks. Moreover, the monthly Canadian real GDP by industry data is pointing to weaker times. Statistics Canada reported today that the Canadian economy grew by 0.1 per cent in June after being unchanged in May. Moreover, the flash estimate for July is a decline of 0.1 per cent. This is a poor handoff to Q3. 

Today’s release of the Canadian national accounts for Q2 is the kickoff of Deloitte Canada’s economic forecast update cycle, and we will publish an updated outlook in a couple of weeks’ time. We continue to expect a sharp economic slowdown, with a distinct possibility of a recession – the odds are a coin toss at the moment. It all depends on how dogmatic central banks intend to be about their inflation targets. Our assumption is that the Bank of Canada and the Federal Reserve will end their interest rate hikes with benchmark policy rates in the 3.50 to 4.00 per cent range. That could allow a soft landing. But, more aggressive and sustained tightening of monetary policy can achieve inflation goals but at the cost of economic contractions.  

Categories: Canadian Economic Outlook, E-Sight, Economics, Quarterly Forecast

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