Canadian real GDP advanced by 3.7% (q/q saar) in 2017 Q1 and 4.5% in 2017 Q2, the fastest pace of economic growth registered since late 2011 (see chart below). But this stellar growth episode is not the whole story. The breakdown of real GDP’s major components includes several signs of a sustainable economic recovery.
Firstly, companies added new productive capacities: non-residential investment rose at a robust pace for a second consecutive quarter (+7.1% q/q ann.) during 2017 Q2. Businesses notably invested more in computer, communication and furniture equipment. Also, the past improvement in commodity prices convinced companies to ramp up investment in engineering structures (+13.2% q/q ann.).
Secondly, Canadian exports of goods resumed its recovery in 2017 Q2 by expanding at its fastest pace in three years (+11.8% q/q ann.), in line with U.S. real GDP growth. Exports of energy products, metals, industrial machinery, autos and aerospace products were the main contributors to export growth. Altogether, in volume, the net export surplus improved from the previous quarter but remains small.
Thirdly, household expenditures surged at a pace unseen post-financial crisis in 2017 Q1 (+4.8% q/q saar) and Q2 (+4.6% q/q saar). Spending in durable goods, non-durable goods and services all rose briskly. This across-the-board increase in consumer spending was supported by a boost in nominal disposable income (+6.8% q/q saar) rather than by a drawdown in savings. The household savings rate edged up from 4.3% in 2017 Q1 to 4.6% in 2017 Q2.
The only major component of GDP that declined in 2017 Q2 was residential investment (-4.7% q/q saar). This being said, there is no broad-based fallout in housing activity (see chart below): renovation spending rose at a healthy pace for a third consecutive quarter (+4.3% q/q ann.) and new construction activity took a breather (0% q/q ann.) after rising sharply in the previous two quarters. Instead, the 4.7% pullback in residential investment is specifically tied to the cooling of resale market conditions in the Greater Toronto area. National ownership transfer costs declined (-24% q/q saar) due to the targeted housing policies announced in Ontario last spring. Since Toronto is the largest housing market in the country, it is logical that this 24% contraction is deeper than the one observed in 2016 Q3 (-18% q/q saar), which was caused by the 15% foreign tax in Vancouver.
Finally, this strong growth momentum is not showing any signs of fading. Real GDP for the month of June rose by 0.3% month over month. Growth was broad-based, with goods (+0.5% m/m) outperforming services (+0.2% m/m) for a second consecutive month.
Bottom Line: Today’s blockbuster GDP report reinforces the need to raise the overnight rate target before the end of the year. In our view, Bank of Canada officials will come up to the conclusion that it is still preferable to stay on the sidelines on Sept. 6th and hike at the Oct. 25th meeting. Indeed, it seems appropriate to wait after the Federal Reserve’s Sept. 20th meeting at which time the Fed will give more guidance about how it intends to shrink its balance sheet and after another possible debt ceiling drama in late September/early October. Moreover, BoC officials should be in no rush to announce a second 25bps hike since Canadian CPI inflation figures remain well below the 2% target.
