Daily Economic Update

Canadian Economic Growth Surprises on Downside

Canadian second-quarter real GDP surprised on the downside, rising at a 2% annualized pace, below market expectations of a 2.3% annualized increase andwell below the forecast put forward by the Bank of Canada in their latest Monetary Policy Report Update. First-quarter GDP growth was revised down to a 3.6% annualized pace from 3.8%.  On a monthly basis, the Canadian economy remained stable in June. The lower-than-expected second-quarter read will prove negative for the Canadian dollar and positive for bonds.

While consumer spending slowed slightly in the quarter to 4.2% from the first quarter’s 5.1% pace, it continued to support the economy.  Expenditures on durable goods decelerated sharply.  Residential investment declined 5.2% after growing at a solid 12.7% in the first quarter due to mild winter weather.  Businesses continued to invest in plant and equipment, although the pace of the investment was slower than that registered in the first. A large business inventory investment was also evident in the second quarter. 

Exports fell 1.2%, continuing the decline seen in the first quarter as manufacturing output weakened further.  Auto exports fell for a second consecutive quarter.  Imports rebounded from a weak first quarter as the Canadian dollar appreciated.  The strength of business investment accounted for much of the increase as imports of machinery and equipment grew. 

Wages and salaries grew by 1.3% in the second quarter, while nominal profits edged ahead 0.4%. 

The details of the report are not all bad news as most of the components contributed to growth in the quarter.  The major drag was net trade.  However, most of the drag in net trade came from imports, which were largely supported by strong business investment.  Hence, the overall picture is not completely one of doom-and-gloom. 

The report is consistent with no change in interest rates at next week’s Bank of Canada meeting and tilts the risk towards no more hikes for the remainder of the year.

Core PCE Deflator Still Above Fed’s Comfort Zone

Personal income grew by 0.5% in July, down slightly down from a 0.6% read in June and in line with market forecast of a 0.5% increase.  Personal consumption expenditures rose 0.8% in July, in line market expectations.

The closely watched core personal consumption expenditure (PCE) deflator rose 0.1%, slightly lower than the 0.2% market consensus forecast.  The slightly weaker month-over month read may initially prove negative for the dollar and positive for bonds. However, with the year-over-year rate at 2.4%, these responses will prove to be short-lived.

In real terms, personal consumption expenditures rose 0.5%,or 2.6% year-over-year. The personal savings rate as a percentage of personal disposable incomecame in at -0.9% from -0.7% last month, indicating that consumers continue to spend over and above disposable income gains.