Resurgence of Canadian exports adds to optimism ahead of GDP data

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Canada's economy almost certainly accelerated in the second quarter of this year, but most observers don't expect the growth figure coming out this week will change the hard-to-impress minds at the Bank of Canada.

Statistics Canada will publish gross domestic product data for both June and the second quarter as a whole on Friday. It will be the last major economic report before the Bank of Canada's next scheduled decision on interest rates and monetary policy, on Sept. 3.

Several recent stronger-than-expected economic indicators, notably in trade and home construction, have led private-sector economists to revise their second-quarter growth expectations upward in the past few weeks. A recent Bloomberg survey of economists pegged the consensus estimate for real (inflation-adjusted) GDP growth for the quarter at an annual rate of 2.6 per cent, up from their 2.2 per cent call in a July survey.

That's not only a substantial upgrade from the economy's sluggish 1.2-per-cent growth pace in the first quarter. It's also a touch stronger than the Bank of Canada's most recent estimate of 2.5 per cent, published last month. Since the Bloomberg survey was completed in mid-August, surprisingly strong June manufacturing and retail sales reports, and a large upward correction to the July employment survey have added to the optimism about the economy's strength.

But the most encouraging factor has been the resurgence of exports. Canada generated a trade surplus of $1.9-billion in June, the strongest month in 2 1/2 years. Together with upward revisions to the prior two months' data, trade showed a second-quarter surplus of $2-billion, the biggest since 2011.

"The trade report for June was big," said Douglas Porter, chief economist at Bank of Montreal, who raised his bank's second-quarter GDP growth estimate to 3 per cent from 2.5 per cent on the strength of the trade numbers. "It suggests trade had a huge contribution to second-quarter GDP."

Meanwhile, surprisingly strong home construction also appears to have added more than anticipated to GDP in the quarter. Housing starts averaged a 197,000 annual rate over the quarter, up sharply from 175,000 in the first quarter, chalking up their strongest quarter since the end of 2012.

"Housing looks to be on a slightly upward trend again, one that could see it revert to a modest growth contributor for a while, after posting negative contributions to GDP growth of late," said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce.

But for the Bank of Canada, even a stronger-than-expected second quarter may not be convincing. The central bank has cautioned that "serial disappointment" from the weaker-than-expected global economy, together with still-tepid business investment and a sputtering labour market, could weigh on Canada's growth in the second half of the year.

Economists said the central bank might soften its pessimistic tone a bit if exports' contribution to the second-quarter numbers is particularly impressive. The bank has identified a recovery in exports as one of its pillars for a healthy Canadian economic recovery.

Still, the bank sees the second-quarter strength as driven in significant part by a bounce-back in demand after a harsh winter that stifled economic activity – including trade – in the first quarter. When it looks at the first half of the year as a whole, it will see an economy that has underperformed.

"The next time we hear from the Bank of Canada, we likely won't see a big change in attitude," said Eric Lascelles, chief economist at RBC Global Asset Management.