Canada’s economy surges 4.5% on consumer spending

Bloomberg.- Canada’s economy unexpectedly accelerated in the second quarter to a Group of Seven-beating 4.5 percent annualized pace amid the biggest binge in household spending since before the 2008-2009 global recession.

Economists had anticipated a 3.7 percent pace, matching the first quarter rate that was left unchanged Thursday by Statistics Canada. The better-than-expected result was due to stronger consumption growth than economists had predicted.

The surge in growth should help cement the chances the Bank of Canada will continue raising interest rates in coming months as the nation’s economy nears full capacity. The central bank forecast in July spare capacity would be eliminated by the end of this year, and that was with second quarter growth forecasts of 3 percent.

Canada’s dollar reversed declines after the report, rising 0.3 percent to C$1.2585 versus its U.S. counterpart at 8:35 a.m. Toronto time. Two-year government bond yields jumped to 1.26 percent from 1.24 percent. Investors are fully pricing in at least one more rate increase by the end of this year, and at least one more in 2018.

Canada’s second quarter let the good times roll, so much so that the country’s national humility has almost everyone assuming that this can’t last,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a note to investors.

Canada’s economy grew at a more-than-expected 0.3 percent pace in June, on the back of higher construction, which should ease worries the expansion will fade out in the second half of this year.

The nation is benefiting from a confluence of developments — some temporary — that include a synchronized global recovery and rising trade volumes, the bottoming of the oil shock in western Canada, federal deficit spending, rising industrial production in developed economies and soaring home prices in Toronto and Vancouver.

Today’s GDP numbers also leave the Canadian economy flirting with 3 percent growth for all of 2017. If that happens, it would end a five-year stretch of sub-3 percent growth that’s already tied as the longest on record in data going back to 1926.

Consumer Binge

Canada’s consumers, benefiting from a buoyant jobs market and rising home values, are on a tear. Household consumption rose at an annualized 4.6 percent pace in the second quarter, following a 4.8 percent gain in the second quarter. That’s the best two-quarter gain since before the 2008 recession.

Another positive in the numbers is pick-up in consumption was financed by gains in disposable income, not a lower savings rate. In fact, the household savings rate increased to 4.6 percent in the second quarter from 4.3 percent. The national savings rate fell to 3.4 percent from 4 percent on less saving by corporations and borrowing from governments.

The broad-based nature of the expansion — which the Bank of Canada has been highlighting in recent months as a justification for higher rates — also continued in the second quarter. All major components of growth except for residential investment increases.

Housing Slumps

It’s tale of two industries for Canada’s housing market. Residential construction was little changed with repair and renovation work posting stronger gains but overall residential investment figures were hurt by slumping activity in the resale market. Total investment in residential structures fell at an annualized 4.7 percent pace due to a sharp decline in the so-called ownership transfer costs associated with real estate transactions.

Another positive was the big jump in inventories in the second quarter wasn’t reversed in the second quarter. Inventories were up, adding 0.1 percentage points to growth in the quarter. Business investment grew for a second straight quarter, something that hasn’t happened since 2014. The back- to-back annualized gains were 7.1 percent in the second quarter and 13.7 percent in the first quarter. That’s the strongest two-month gain since 2012.

Canada’s energy sector also delivered in the second quarter. A surge in oil production helped fuel an annualized 9.6 percent gain in exports of goods and services, the fastest gain since the first half of 2014, outpacing the 7.4 percent gain in imports.

The second quarter gain is the strongest since 2011. Canada’s economic growth over the past two quarters was the best first half for the economy since 2002.

 

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