‘A longer road to recovery:’ Canada’s economy shrinks, catching economists by surprise

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Canada’s economic recovery lost momentum in the second quarter after posting consistent growth since the depths of the pandemic and delivered a shock to forecasters.

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The economy contracted 0.3 per cent between April and June, or 1.1 per cent on an annual basis, Statistics Canada reported on Aug. 31. Adding to the dismal report, the federal agency delivered preliminary data for July that showed gross domestic product declined 0.4 per cent, a worrisome start to the third quarter.

A decline in housing activity and slowed exports overshadowed gains in business investment, which caused a drag on the economic recovery. It’s the first quarterly drop in GDP since the second quarter of 2020, which saw the economy contract 11.3 per cent, or 38 per cent annualized.

“It’s a jaw-dropper,” BMO chief economist Douglas Porter told Reuters. “Completely different from what Statistics Canada was estimating and what every economist was predicting.”

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The data missed economists’ estimates, which had expected growth of 2.5 per cent for the quarter, and dampened initial optimism about broader business reopenings as much of the country exited the wave of the COVID-19 pandemic.

“The Canadian economy was not quite as resilient as pretty much everybody thought and there’s more ground to make up at this point,” said Benjamin Reitzes, economist and Canadian rates and macro strategist at Bank of Montreal. “It’s a longer road to recovery.”

Housing has been a sector of the economy that experienced a flurry of activity over the pandemic, driven in part by historically low interest rates and extraordinary government stimulus. But, in recent months the real estate market has cooled, which is reflected in the GDP data. Home ownership transfer costs, which includes all costs associated with the sale of a home, declined 17.7 per cent in the quarter.

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Exports also experienced negative growth in the quarter, dropping four per cent. Reitzes attributed the declines to woes in the manufacturing and auto sectors that are currently battling global chip shortages and supply-chain disruptions.

“Looking further ahead, clouds are forming for the Canadian economy,” Sri Thanabalasingam, a senior economist at Toronto-Dominion Bank, wrote in a note to clients.

The latest data suggests the Bank of Canada, which had forecast second-quarter growth of two per cent, will likely revise down its projections for GDP.

With additional reporting by Reuters

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