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Modest Second Quarter Growth as Competing Economic Forces Muddy the Waters

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Canadian real GDP inched up by 0.1 per cent in June, in line with Statistics Canada’s preliminary estimate. June’s performance caps off a second quarter in which the Canadian economy expanded by 0.8 per cent, a fourth consecutive quarterly increase.

Output rose in 14 of the 20 industrial sectors. In the goods economy, there was notable growth in the agriculture, forestry, fishing and hunting industry (+1.5%) fuelled by rising crop production. Among services, growth was led by client-facing industries as public health and border restrictions continued to ease. The Bank of Canada raised interest rates for a third time in June, adversely affecting output in sensitive industries including finance and insurance (–0.6%), construction (–0.4%) as well as real estate and rental and leasing (–0.1%).

Canada’s terms of trade, the relative price of exports in terms of imports, improved as export price growth outstripped import price growth. Increases in the price of several energy products in the second quarter drove export prices up by 8.8 per cent. Meanwhile, total compensation of workers increased for a third consecutive quarter largely due to rising wages. A combination of wage and price growth resulted in a 4.2 per cent increase in nominal GDP on the previous quarter.

Household spending patterns continued to adjust in the second quarter. Spending on services increased by 3.9 per cent while outlays on semi-durable goods increased by 5.6 per cent as the return to offices led to more purchases of garments and footwear. A rise in household disposable income was more than offset by higher consumption in the second quarter resulting in lower net savings. The savings rate fell from 9.5 per cent in the first quarter, to 6.5 per cent in the second quarter. Despite the decline, the savings rate remains more than double that which was recorded prior to the pandemic.

Key Insights

Softening gas prices in July have raised hopes that inflation may be peaking. While measures of core inflation have yet to follow suit, inflation expectation are particularly sensitive to changes in fuel prices. While inflation continues to squeeze household budgets, for governments, it means higher revenues from income, corporate income and sales taxes. With nominal GDP forecast to increase by 12.2 per cent in 2022, provincial and federal governments will enjoy greater fiscal headroom that can be used to fund spending programs or deficit reduction.

Momentum in the labour market is softening. Over the second quarter, there was scant employment growth and a further decline in July brought the number of jobs in the economy below the level recorded at the end of the first quarter. Sharp interest rate rises are contributing to weaker hiring activity among firms, with further rate hikes by the central bank expected in the coming months. As growth slows in the coming quarters, it is hoped that the high number of unfilled vacancies in the economy can limit extent to which the unemployment rate rises.

Household savings, which rose sharply during the pandemic, have remained resilient in the face of the rising cost of living. However, the pressure of higher prices for goods and services will force many households to choose whether to reduce savings or cut back on discretionary spending. Weakening consumer confidence suggests households will increasingly favor the latter approach, especially if wage growth begins to falter. Overall, the economy is emitting mixed signals with several competing forces at play. While rate hikes continue to cool the housing market and raise borrowing costs, pent-up consumer demand is supporting a resurgent tourism sector and strong labour demand has brought the unemployment rate to a record low.

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Liam Daly

Liam Daly

Economist

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