The economy’s yo-yo growth continues in August

• The Canadian economy picked up in August, growing by 0.4 per cent, following a flat performance in July. Yet this was a weaker performance than Statistics Canada’s expectation of 0.7 per cent growth.
• Statistics Canada’s preliminary estimate suggests GDP was little changed in September. This would bring third quarter growth to 0.5 per cent, slightly weaker than our 0.8 per cent estimate.
• The goods sector inched down by 0.1 per cent. The manufacturing industry grew by 0.5 per cent, supported by increases in non-durable manufacturing. Drought conditions in the Prairies continued to hamper output in the agricultural sector, which suffered the largest decline of any industry (-5.7 per cent). Meanwhile, high temperatures in central regions pushed up output in the utilities sector (+1.5 per cent) as energy demand for cooling purposes rose. The construction industry remained relatively flat as the decline in residential construction was offset by repair and non-residential building construction growth.
• The services sector grew by 0.6 per cent, more than offsetting the fall in the goods sector. Once again, growth was fueled by the ongoing recovery of high contact services. The accommodation and food services industry grew by 7.0 per cent, though output remains almost 20 per cent below its pre-pandemic level. Retail trade bounced back after a weak performance in July (+1.7 per cent). Amid increased levels of air transportation, of both passengers and goods, the transportation and warehousing industry grew by 1.2 per cent.

Key insights:

1. Following the reopening of the economy, the Canadian consumer wants to spend more. But global supply chain disruptions and labour shortages are creating challenges for firms to meet consumers’ demands. This is driving prices upwards, forcing a lot of Canadians to hold back from spending on large-ticket items. Supply issues will be a dampener for growth well into next year, while inflation will remain well above Bank of Canada’s upper limit of 3 per cent. Still, this is not stagflation. ‘Stagflationary winds’ at best.
2. A perfect storm of supply bottlenecks, growing demand and adverse climate conditions have triggered a hike in global energy prices. This means higher fuel and heating prices for households at a time when the cost of housing and food is already rising. On the other hand, as a net exporter of oil and natural gas, Canada stands to benefit from higher prices. However, a failure of producers to reinvest proceeds into productive capacity would limit the long-term gains for the sector and the economy.
3. Accommodation and food services are making a comeback but are still a long way away from pre-pandemic levels. Canada’s opening of its borders to fully vaccinated US travellers in August should help. The opening marked an important step in what will be a protracted recovery for international tourism. The return of visitors to Canada will be gradual and, of course, contingent on the ever-evolving global COVID-19 situation. From big cities to remote communities, tourism is an important source of revenue for many Canadian businesses and is necessary for a full recovery in the accommodation and food services industry.