Canada’s economy recorded a stronger-than-expected rebound in the second quarter as exports recovered, however underlying details revealed weak consumption and business investment.

Canada’s economy recorded a stronger-than-expected rebound in the second quarter as exports recovered, but surprisingly weak consumption and business investment will cast doubts on the expansion’s sustainability.

Output grew at an annualized pace of 3.7% in the three months through June, Statistics Canada said on August 30th, up from a paltry 0.5% increase in the first quarter. Economists had predicted a 3% increase. The quarter also ended better than expected, with a monthly expansion of 0.2% in June.

But the underlying details were less impressive. The rebound was driven by the fastest quarterly increase in exports since 2014, but growth in household consumption came to a near halt despite strong gains in incomes, and business investment suffered its largest decline in more than two years. As a result, domestic demand actually contracted in the second quarter.

That could be a signal of growing unease among households and businesses about global economic conditions, fuelled by concerns over the U.S.-China trade war and potentially foreshadowing a sharper slowdown in the second half of the year. Policy makers at the Bank of Canada may look through some of the strength in the report.

“This was a ‘less than meets the eye’ report,” Brian DePratto, senior economist at TD Bank, said in a note to investors. “Not only were today’s details weak, but since the second quarter ended we’ve seen yet another escalation in the trade wars and associated uncertainty.”

DePratto said he expects the Bank of Canada to join the global trend toward easing monetary policy in October, an increasingly likely scenario according to swaps trading. A second cut is being priced in by investors sometime next year. The Bank of Canada announced that they would hold the rate as of September 4th. August 30th’s GDP numbers beat the bank’s 2.3% forecast, and economists had predicted a 3% increase.

‘Solid increase’
Despite the worrying details, the Canadian economic expansion in the second quarter was still impressive — growing the most in two years at easily the fastest pace in the Group of Seven. The U.S. economy expanded by an annualized 2% over the same period.

Shipments by Canadian exporters rose at a 13% pace, contributing more than 4 percentage points to growth. A drop in imports also added to the expansion, as more of the nation’s demand was used to buy domestically produced goods and services.

Housing investment, meanwhile, recorded its first gain in six quarters.

It’s the sort of data that makes the case for cheaper money less compelling in Canada than it is elsewhere. Even two cuts over the next 12 months will still leave the country with the highest policy rate among advanced economies.

“The solid increase in the headline numbers leaves our call intact for the Bank of Canada to remain patient on cutting rates for the next few months,” said Royce Mendes, an economist at CIBC, which expects a cut in January.

Source:  The Star