Quick take

Drought and wildfires contribute to a tepid performance in July

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  • The Canadian economy inched downward by 0.1 per cent in July, marking a flat start to the year’s third quarter. Still, it was better than Statistics Canada’s expectation of a 0.4 per cent contraction.
  • A preliminary estimate of 0.7 per cent for August by Statistics Canada points to an improving third quarter, aided by growth in retail and the accommodation and food services industry. Stronger numbers in August will allow the economy to reach the 0.8 per cent growth that we forecast for the third quarter
  • The goods sector declined by 1.4 per cent, fueled by drops in utilities and agriculture, forestry fishing and hunting output. The extreme drought conditions in Western Canada were responsible for reduced agricultural production while wildfires in British Columbia and Ontario damaged production in the forestry industry. Construction output fell for the fourth consecutive month as residential construction continued to cool.
  • The services sector grew by 0.4 per cent, supported by the ongoing recovery of high-contact services industries. The accommodation and food services sector expanded by 12.5 per cent, by far the largest growth of any industry, thanks to most restrictions on indoor dining being lifted. The arts, entertainment and recreation sector, which remains the furthest from pre-pandemic levels, grew by 8.1 per cent. Retail fell by 1.1 per cent indicating that pent-up demand among consumers may be waning. Elsewhere the public sector performed well, supported by growth in educational services and the health care and social assistance sector.

Key insights:

  • Canadians enjoyed greater freedom to spend on in-person dining, entertainment, and travel in July. As demand for these services grew, consumers redirected spending away from real estate and goods such as building material, garden supplies and sporting goods. Meanwhile, the drop in agricultural, forestry and fishing activity due to heatwaves, droughts and wildfire in Western Canada is a reminder of how climate change-related developments impact GDP growth.
  • As the fourth wave builds, elevated vaccination rates combined with proof-of-vaccination schemes should reduce the need to reimpose strict measures on high-contact services. However, the return of students to classrooms and universities is likely to increase transmission. Across Canada, particularly where hospital capacity is limited, higher rates of transmission increase the likelihood of restrictions being reimposed
  • The Canadian economy is not out of the woods yet. While the resilience of the population and the economy to the pandemic has improved, several growth challenges remain. Labour shortages have worsened, and ongoing supply-chain disruption means that businesses and consumers face higher costs, both of which could dampen growth at least until the end of this year.

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Liam Daly

Liam Daly

Economist

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