Canada's economy posts surprise second-quarter contraction, casting shadow over recovery - The Globe and Mail

Shipping containers at the Port of Montreal, on May 17.

CHRISTINNE MUSCHI/Reuters

The Canadian economy suffered a shock contraction in the second quarter and the summer reopening is off to a rocky start, casting a shadow over the country’s recovery process.

Exports were slammed from April to June, a direct consequence of global supply-chain disruptions. Key materials are in short supply, freight rates have surged to records, and container ships wait days to unload at ports, leading to incessant headaches for companies.

Those challenging dynamics are poised to continue for some time, particularly as the Delta variant of COVID-19 spreads widely among key trading partners in the Asia-Pacific region.

Exports fell at a 15-per-cent annualized rate in the second quarter, with particular weakness in the auto industry, which has slashed production due to a shortage of computer chips.

In turn, real gross domestic product fell 0.3 per cent in the second quarter, or an annualized drop of 1.1 per cent, Statistics Canada reported Tuesday. Analysts were expecting an expansion of 2.5 per cent annualized, while the Bank of Canada called for 2 per cent in July.

It was the first quarterly decline in output since the second quarter of 2020, when COVID-19 began to ravage the economy, and precedes a test from the Delta variant.

Making matters worse, Statscan said real GDP dropped 0.4 per cent in July, giving back about half of June’s gain, according to a preliminary estimate that surprised those on Bay Street, who were expecting a healthy start to summer as Canadians unleashed their pent-up savings.

“It was quite a bit weaker than expected,” Stephen Brown, senior Canada economist at Capital Economics, said of Tuesday’s report. “The key message here is that perhaps the recovery isn’t as strong as economists have thought.”

The housing sector was another weak spot. Residential investment fell 12.4 per cent annualized in the second quarter. That was entirely due to a steep drop in ownership transfer costs, or those associated with the transfer of residential homes between people. Home resale activity has cooled from record heights in major markets across the country.

Housing and exports more than offset a bounceback in business investment, which expanded by 12.1 per cent annualized as companies ploughed money into machinery and equipment.

With many restrictions in place last quarter, Canadians stashed away plenty of cash, sending the household savings rate up to 14.2 per cent from 13 per cent. Household consumption barely budged, though excess bank deposits have surged more than $200-billion over the health crisis.

That’s fuelled the expectation that Canadians can spend heavily to support the recovery as COVID-19 restrictions are relaxed, with notable gains in the summer reopening.

A potential trouble, however, is that supply troubles are keeping a lid on what consumers can possibly spend, Mr. Brown said.

“If you’re looking for certain electronics, you just can’t get them at the moment,” he noted. “That is another reason why it could take longer for GDP to fully recover.”

Following Tuesday’s surprise, Bay Street was forced to rip up their forecasts. For one, Bank of Montreal now expects a GDP expansion of 5 per cent in 2021, down from 6 per cent.

“Remember all the commentary about how well the Canadian economy had dealt with the third wave restrictions during the spring? And how businesses and consumers had learned how to operate amid the virus?” said BMO chief economist Doug Porter. “Well, the reality appears to have been much less constructive, with widespread supply chain issues also causing havoc with growth in the quarter.”

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Canada's economy posts surprise second-quarter contraction, casting shadow over recovery - The Globe and Mail
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