Statistics Canada will publish Canada’s GDP report for 2019 Q2 on Friday, Aug. 30. We forecast growth of 3.0% (Q/Q SAAR) on par with consensus. After growth nearly came to a halt in 2018 Q4 (+0.3%) and 2019 Q1 (+0.4%), the Canadian economy rebounded in 2019 Q2. Many GDP components that held back growth in the last few quarters have registered healthy gains in 2019 Q2, according to our tracking of high-frequency data.
First, international trade, which had removed almost 4 percentage points from growth last quarter, should underpin real GDP by about the same magnitude in the second quarter. Goods exports, having failed to lift up in in 2019 Q1 due to setbacks in commodity-related industries, have risen by almost 15% as the U.S. economy continued to import more Canadian products. Gains were broad-based as 10 out of 13 industries posted Q/Q increases. One area of weakness came from exports of forestry products, buildings and packaging materials, declining for a fourth consecutive quarter. Duties imposed by the United States on softwood lumber and the slowing Chinese economy continue to hurt wood producers.
Second, we expect household consumption to grow below trend in 2019 Q2 after outsized gains were made in both durable and non-durable goods in 2019 Q1. In real terms, retail sales increased by only 0.4% in 2019 Q2, despite the acceleration in wage growth and strong job creation observed during the first half of 2019.
Third, we estimate that business investment stalled: a pullback in M&E investment (caused by a large aircraft import in 2019 Q1) is offset by marginal increases in non-residential building and intellectual property investment. Investment in the oil and gas industry likely declined for a sixth consecutive quarter. Residential investment is a silver lining: housing starts and monthly investment data both indicate a strong pickup in new construction activity in the second quarter. Also, the level of MLS resale transactions rose to its highest level since the B-20 stress test for low-ratio mortgages came into effect in January 2018. Therefore, after contracting in 7 out of the last 9 quarters, a positive momentum in Canada’s housing market activity appears to have been restored for good in 2019 Q2.
Bottom Line
In its July 2019 Monetary Policy Report, the Bank of Canada projected 2.3% real GDP growth in 2019 Q2 and 1.3% for the entire year 2019. This forecast and the Governing Council's risk assessment regarding the outlook were enough to take out imminent policy rate cuts out of the picture. While global tensions have risen sharply since, Canada’s domestic economy has fared relatively well. On one hand, if, as we expect, 2019 Q2 GDP growth is significantly stronger than the BoC’s projection, a dovish message is unlikely at its next monetary policy announcement on Sept. 4. While a rate cut on Oct. 30 is expected at 80% by market participants, we are still of the view that the BoC will remain on hold for the remainder of 2019. On the other hand, a disappointing headline number on Friday or details showing a lack of sustainability in this sudden surge in economic activity would give the always data-dependent BoC an argument to join in the global chorus of central banks entering into easing mode.