Canada’s economy unexpectedly accelerated at a 4.5 per cent pace in the second quarter — tops among Group of Seven countries — led by the biggest binge in household spending since before the 2008-2009 global recession.
Annualised growth was the fastest in six years and topped the 3.7 per cent average forecast from economists. The expansion surpassed the 3.7 per cent first quarter growth rate, which was left unchanged by Statistics Canada.
The surge in growth should help cement the chances the Bank of Canada will continue raising interest rates this year — possibly as soon as next week — as the nation’s economy nears full capacity in what is turning out to be the strongest growth spurt in more than a decade. The central bank forecast in July spare capacity would be eliminated by the end of this year, based on a second-quarter growth forecast of 3 per cent.
“The hits just keep coming for the Canadian economy,” Doug Porter, chief economist at Bank of Montreal, said in a note to investors. “Even the naysayers will struggle mightily to find fault in this rock-solid report.”
Investors are fully pricing in at least one more rate increase by the end of this year, and at least one more in 2018. The odds of a hike as early as the September 6 rate decision jumped to 41 per cent, from 27 per cent Wednesday, based on trading in the swaps market. Canadian Imperial Bank of Commerce adjusted its forecast and now calls for a rate hike next week.
The nation is benefiting from a confluence of developments that include a synchronised global recovery and rising trade volumes. The bottoming of the oil shock in western Canada is also helping, along with federal deficit spending, rising industrial production in developed economies and soaring home prices in Toronto and Vancouver. The second-quarter gain marks a fourth straight quarter of above-potential growth, averaging 3.7 per cent over that time. That’s the fastest four-quarter average since 2006.
The release will also temper worries the best is behind for Canada’s economy. Economists had been predicting a slowdown in growth to about 2 per cent in the second half of this year, but are revising numbers up after the GDP report.
Canada’s economy grew at a more-than-expected 0.3 per cent pace in June, on the back of higher construction, versus expectations for 0.1 per cent growth. That should ease worries the expansion is fading out. From a year ago, GDP in June was 4.3 per cent higher.
“Canada’s second quarter let the good times roll, so much so that the country’s national humility has almost everyone assuming that this can’t last,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a note to investors.
Today’s GDP numbers also leave the Canadian economy flirting with 3 per cent growth for all of 2017. If that happens, it would end a five-year stretch of sub-3 per cent growth that’s already tied as the longest on record in data going back to 1926. It would also be a full percentage point of growth faster than the US.
Canada’s consumers, benefiting from a buoyant jobs market and rising home values, are responsible for the surge. Household consumption rose at an annualised 4.6 per cent pace in the second quarter, following a 4.8 per cent gain in the first quarter. That’s the best two-quarter gain since before the 2008 recession.
Another positive in the numbers is that the pick-up in consumption was financed by gains in disposable income, not a lower savings rate. In fact, the household savings rate increased to 4.6 per cent in the second quarter from 4.3 per cent. The national savings rate fell to 3.4 per cent from 4 per cent on reduced saving by corporations and borrowing from governments.
The broad-based nature of the expansion — which the Bank of Canada has been highlighting in recent months as a justification for higher rates — also continued in the second quarter. All major components of growth except for residential investment increased.
The GDP report exposed a tale of two industries for Canada’s housing market. Residential construction was little changed, with repair and renovation work posting stronger gains. Overall residential investment figures were hurt by slumping activity in the resale market. Total investment in residential structures fell at an annualised 4.7 per cent pace due to a sharp decline in the so-called ownership transfer costs associated with real estate transactions.
Another positive was that the big jump in inventories in the first quarter wasn’t reversed in the second quarter. Inventories were up, adding 0.1 percentage points to growth in the quarter. Business investment grew for a second straight quarter, something that hasn’t happened since 2014. The back- to-back annualised gains were 7.1 per cent in the second quarter and 13.7 per cent in the first quarter. That’s the strongest two-month gain since 2012.
Canada’s energy sector also delivered. A surge in oil production helped fuel an annualised 9.6 per cent gain in exports of goods and services, the fastest increase since the first half of 2014, outpacing the 7.4 per cent gain in imports.
The second quarter gain is the strongest since 2011. Canada’s economic growth over the past two quarters was the best first half for the economy since 2002.