Economy slowing down: Statistics Canada

Real gross domestic product (GDP) was nearly unchanged in the second quarter, following a 0.6% rise in the first quarter, according to a report released Friday by Statistics Canada.

Vlada Karpovich

The slowdown was attributable to continued declines in housing investment, smaller inventory accumulation, as well as slower international exports and household spending. Increased business investment in engineering structures and higher government spending were among the few components that contributed to growth. Final domestic demand rose by 0.3%, a similar increase to that seen in the first quarter of 2022, said the federal agency.

“Housing investment fell 2.1% in the second quarter, the fifth consecutive quarterly decrease. The decline was led by a sharp drop in new construction (-8.2%), which was observed in every province and territory except for Nova Scotia. Renovation activities (-4.3%) also fell. These declines coincided with higher borrowing costs and lower demand for mortgage funds, as the Bank of Canada continued their monetary tightening, raising the policy interest rate to 4.75% in the second quarter,” said the report.

“Despite higher borrowing costs, ownership transfer costs (+18.2%), which represent resale activity, posted the first increase since the fourth quarter of 2021.”

StatsCan said lower inventory accumulations in the second quarter compared with the previous quarter applied downward pressure on GDP growth, resulting in the smallest buildup in the stock of inventories since the fourth quarter of 2021. In the second quarter of 2023, the economy-wide stock-to-sales ratio reached its highest level since the second quarter of 2020.

“Growth in real household spending slowed to 0.1% in the second quarter from 1.2% in the first quarter. The slight increase in spending on goods (+0.1%) in the second quarter was led by higher spending on new trucks, vans and sport utility vehicles (+3.3%), reflecting improvements in previous supply chain challenges. Growth was moderated, however, by declines in new passenger cars (-9.5%), furniture and furnishings (-3.3%), major durables for outdoor recreation (-8.3%) and natural gas (-6.4%),” added the report.

“Household spending on services was unchanged in the second quarter, following a 1.1% rise in the first quarter. In the second quarter, sharp declines in spending by Canadians abroad (-6.3%) and expenditures on alcoholic beverage services (-5.9%) offset the rise in spending on shelter services (+0.5%), air transport (+6.8%) and telecommunication services (+1.9%).

“While aggregate household expenditures edged up in the second quarter, spending per capita fell 0.7%. In fact, per capita household spending declined in three of the last four quarters.”

Real gross domestic product (GDP) decreased 0.2% in June, following a 0.2% increase in May. Both services-producing industries (-0.2%) and goods-producing industries (-0.4%) contracted in June with 12 of 20 industrial sectors posting decreases.

So much for that overheating economy. While Canada’s economy was widely expected to slow in the second quarter of 2023, today’s report came well under expectations. Various special factors contributed to this, including the multiple worker strike actions and rampant wildfires, which shut down oil & gas production in May and limited consumer activity in June. While federal government transfers in July may result in a short-term boost in the third quarter, we believe Canada has entered a stage of below trend economic growth. This should continue through the rest of this year, as the impact of high interest rates work through the economy to prevent another acceleration in demand,” said James Orlando, Senior Economist, TD Economics. 

“When the Bank of Canada decided to raise rates in June and July, it did so largely because consumer momentum was so strong in the first quarter of 2023. But with today’s weak report and with employment growth decelerating to a 12k pace (three-month average), from 80k in the first quarter, consumer demand should continue to act as a weight on growth. This cooling off is exactly what the BoC wants to see in order to be confident that inflation will keep pushing towards the 2% target. We think it will continue, justifying our call for the BoC to remain on the sidelines for the rest of this year. Markets are taking this cue with the Canada 2-year and 10-year yields falling this morning, and down by approximately 30 basis points over the last two weeks.”

Douglas Porter, Chief Economist, BMO Economics, said: “We are sticking to our view that Canada will experience a mild contraction, and today’s surprisingly soft Q2 obviously makes that outcome much more likely. The broad softening in the domestic economy will almost certainly move the BoC to the sidelines at next week’s rate decision after back-to-back hikes. Between the half-point rise in the unemployment rate, the marked slowing in GDP, and some cooling in core inflation, it now looks like rate hikes are over and done. Now, the Bank of Canada just has to be patient as they wait for inflation to come their way—but that could take some time, especially with oil prices backing up again.”

Mario Toneguzzi

Mario Toneguzzi is Managing Editor of Canada’s Podcast. He has more than 40 years of experience as a daily newspaper writer, columnist, and editor. He was named in 2021 as one of the Top 10 Business Journalists in the World by PR News – the only Canadian to make the list)