Canada’s economy barely grew in the second quarter, new figures revealed on Friday, lending further evidence that growth has stalled amid falling US demand for Canadian exports.
Gross domestic product expanded by just 0.1 per cent over the quarter – just 0.3 per cent on an annualised basis – much less than the Bank of Canada and most private forecasters were expecting. This follows a slip in GDP in the first quarter, and suggests that Canada is skirting the brink of a technical recession.
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Meanwhile, new figures from the US revealed that consumer spending fell 0.4 per cent in July after allowing for inflation, puncturing optimism fostered by this week’s upward revision to US second quarter growth.
The new data suggest that US household spending is weakening as the effect of tax rebates wears off. Most analysts still expect the US to grow at an annualised rate of close to 2 per cent in the third quarter, with gains from trade and inventories.
In effect, the US is exporting some of its weakness to countries such as Canada by importing less and exporting more, benefiting from the past fall in the US dollar. But it now seems possible that US consumption could contract during the third quarter and possibly beyond, heightening concerns about a “double-dip” US downturn.
Second quarter growth in Canada was well below forecasts by private sector economists, many of whom had anticipated 0.7 per cent growth in GDP (not annualised) over the quarter.
Exports, long the country’s economic engine, fell for the fourth consecutive quarter, down nearly 5 per cent from last year due mainly to falling US demand for cars and lumber.
“The story that Canada’s resource riches could help it sustain the US difficulties has gone right out the window in the first half of this year,” said Derek Holt, senior vice-president at Scotia Capital Markets.
Several indicators suggest the economy is fraying. Job losses are mounting, housing starts and resale values are slipping, business spending is declining and the Canadian dollar has fallen after strong gains last year.
Canada has so far avoided a full-blown domestic credit squeeze of the kind at work in the US. Consumer spending and corporate profits remain strong, with profits in the second quarter at their highest since the first quarter of 2004.
Canada also benefits from high commodity prices. But global weakness has put a damper on the gains Canada makes from commodities, even though these remain at elevated levels even after recent drops in value.
The sources of strength in Canada in the second quarter are “clearly unsustainable”, said Sal Guatieri, senior economist at BMO Capital Markets.
The Bank of Canada is not expected to cut interest rates on Tuesday, having shaved the benchmark rate to 3 per cent earlier this year.
The economy’s troubles come at a difficult time for Stephen Harper, Canadian prime minister.
He may call a federal election between September 2 and September 7, one of his aides said, as the governing Conservatives struggle to find common ground with opposition parties. That means one possible election date is October 14, the official said.
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