Economic growth pauses after second quarter boom

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The Conference Board of Canada’s Economist Robyn Gibbard offers the following insights on today's GDP release:

We have been waiting for July GDP data to provide our first glimpse at how the economy is faring after its strong second quarter performance. GDP growth soared past most projections in the second quarter, but this morning’s data shows that GDP was flat in July. This is in line with our expectations that growth will be slower for the rest of 2019.

Insights

  • After growing strongly for four consecutive months, real GDP was flat in July. Compared to July 2018, real GDP is up 1.3 per cent year-on-year. That is a relatively slow pace of growth and means the economy is now growing slower than its potential.
  • The July data told a story of two economies. Goods-producing industries—like mining, manufacturing, and construction—contracted across the board. At the same time, services-producing industries—such as wholesale trade, retail trade, and real estate—grew strongly. The two opposite trends offset each other.
  • The strong GDP growth we saw in the second quarter was supported by a large boost in energy exports. Although we only have one month of data from the third quarter, a repeat performance already seems unlikely. Oil and gas extraction activity declined 3.0 per cent, with the conventional side of the market suffering its biggest decline in a decade.
  • Overall, mining was the biggest negative contributor to GDP growth in July. Construction and manufacturing both contracted as well, by 0.7 per cent and 0.1 per cent, respectively.
  • The largest positive contributor to growth was wholesale trade, which expanded by 1.1 per cent. However, that was largely due to a record import of pharmaceutical products, so we are likely to see a bit of a reversal in future months.
  • Retail trade grew by 0.1 per cent in July, a more moderate pace of growth than we saw in the second quarter. Professional services had its strongest growth in five years on the back of a huge bump in real estate activity in the greater Vancouver and Toronto areas.
  • This morning’s GDP report is in line with our most recent forecast that expects economic growth to slow for the remainder of the year. The second quarter growth was due to a pickup in energy exports, but July’s contraction in the mining sector confirms that pace is unsustainable.
  • With GDP now growing slower than potential, the case continues to build for the Bank of Canada to cut interest rates early next year.

Robyn Gibbard

Economist

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