Canada's economic growth slows, but numbers could have been worse

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Canada's June and second-quarter gross domestic product (GDP) numbers are the kind that test whether you're a glass-half-full or glass-half-empty kind of person. The numbers aren't good, but they could have been worse.

Second-quarter GDP growth came in ever so slightly better than economists' estimate – up 1.7 per cent on an annualized basis, versus the 1.6-per-cent consensus call. Still, it's a pretty tepid number, held down by a downright lousy June, in which GDP shrank 0.5 per cent – a bit worse than the consensus estimate of 0.4 per cent.

But June was undeniably an anomaly; we all knew it would be. The Quebec construction strike and the Alberta floods placed a giant asterisk next to the month.

The construction impact was glaringly evident in the numbers, as construction activity fell nearly 2 per cent in the month. The construction drop by itself accounted for more than one-quarter of June's total GDP decline. The report didn't break out GDP by province, so it's pretty hard to gauge how much the floods slowed Alberta's contribution, but some sectors we expected would feel the flood impact – wholesale and retail trade, inventories, resource extraction – did show significant declines in the month. Somewhat surprisingly, however, oil and gas extraction actually showed a 2.1-per-cent increase in June, and the energy sector overall rose 0.8 per cent – perhaps suggesting that the floods may not have slowed down Alberta's biggest industry as much as previously thought. (Economists had estimated that Alberta's floods may have slashed up to 0.3 per cent from national GDP in June.)

More of a concern was June's 1.3-per-cent slump in manufacturing. As Toronto-Dominion Bank economist Leslie Preston noted, the manufacturing weakness "is difficult to chalk up to any temporary shock." Manufacturing hasn't posted a month of meaningful growth since last fall, and is now down 3.1 per cent year over year – shaving about 0.4 per cent off total GDP growth over the past 12 months.

Meanwhile, Statscan noted that the national savings rate declined in the second quarter, to 4 per cent from 5 per cent in the first quarter. However, most of that came from a decline in savings from non-financial corporations – likely a function of weak corporate earnings in the quarter (operating profits nationwide fell 0.8 per cent). It certainly wasn't evidence that companies were spending more of their money on growing their businesses – business investment contracted at an annualized rate of 2.5 per cent in the quarter. (Again, the Quebec construction strike probably constrained some of this business spending.) The household savings rate was little changed, at 5.1 per cent versus 5.3 per cent in the first quarter.

It's worth noting that the 1.7-per-cent pace in the second quarter, while hardly awe-inspiring, was nevertheless well above the Bank of Canada's most recent estimate of 1.0 per cent (contained in the quarter Monetary Policy Report released in mid-July). It suggests that, perhaps, the economy is ahead of the pace the central bank is looking at in terms of the timing of an eventual interest-rate increase. However, since first-quarter GDP growth was revised down (to 2.2 per cent from 2.5 per cent) and since the Alberta floods may not have delivered as big an economic hit as previously feared, the economy might not enjoy as strong a rebound in the third quarter as the 3.8 per cent annualized rate that the central bank has predicted; economists were already musing this morning that the bank might have to revise that downward.