Canadian GDP Growth Accelerates to 2.9% on Surge in Exports

(Bloomberg) -- Canada’s economy grew at the fastest pace in a year in the second quarter as exports surged, though a slowdown in business investment may cast some clouds over the brighter economic picture.

Gross domestic product expanded at a 2.9 percent annualized pace from April to June, faster than a 1.4 percent increase in the first quarter of 2018, Statistics Canada said in a report Thursday from Ottawa. Exports jumped by an annualized 12.3 percent, the biggest quarterly gain since 2014.

Still, the numbers may be a slight disappointment as slowing investment brought growth in below analyst forecasts. It’s a development that will give the Bank of Canada little reason to speed up interest-rate hikes, given the importance policy makers have placed on the need for demand to rotate away from consumption toward business investment. Investors are betting a rate hike by October is a near certainty, with a small chance of an increase as early as next week’s Bank of Canada rate meeting.

The GDP figures “are enough reason for the Bank of Canada to wait until October to hike again,” Avery Shenfeld, chief economist at CIBC World Markets, said in a note to investors, calling the numbers “in-line” with expectations.

The Canadian dollar dropped on the report, falling 0.4 percent to C$1.2963 per U.S. dollar at 8:49 a.m. in Toronto trading.

Economists surveyed by Bloomberg News had anticipated a 3.1 percent advance in the second quarter, while the central bank had been forecasting a 2.8 percent gain.

Investment Slowing

Gross business investment -- which had been on a run of late -- was up an annualized 1.5 percent pace in the second quarter, the slowest since the end of 2016. Gross fixed capital formation -- which includes government investment -- grew by less due to a fall in public spending, advancing by just 0.9 percent. That’s well below economist expectations for growth of closer to 4 percent.

Growth in non-residential structures, machinery and equipment slowed to 1.9 percent from 11.4 percent in the first quarter -- also the slowest since 2016.

Exports however were a big positive and the largest contributor to growth, confirming the sector has stepped onto much more solid footing after struggling for years following the 2008-2009 recession.

Consumer spending rebounded from a tough start to the year, accelerating at a 2.6 percent pace in the second quarter, slightly faster than economists predicted. This suggests households are overcoming concerns that had been weighing on spending -- in particular whether the country was in store for a sharp housing slowdown.

A correction in housing didn’t materialize however and investment in residential structures rebounded in the second quarter following a sharp decline in the first three months of the year.

One negative in the consumption numbers may be that the increased spending was financed by a lower household savings rate.

On a monthly basis, GDP in June was unchanged from May, weighed down by a major power failure at a key facility of Suncor Energy Inc., Canada’s largest oil producer by market value.

--With assistance from Erik Hertzberg.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Greg Quinn

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