Canada’s economy surged ahead in the second quarter, with exports driving growth in gross domestic product to an annualized rate of 3.7 per cent, according to Statistics Canada.
That growth was well above the 3 per cent that most economists expected, and it vastly outpaced the Bank of Canada’s 2.3-per-cent prediction from its Monetary Policy Report in July. It’s the Canadian economy’s best quarterly performance since 2017.
“That big quarterly number … does tend to happen when you have trade adding significantly to growth, and that’s exactly what happened in the second-quarter,” said Benjamin Reitzes, Canadian rates and macro strategist with Bank of Montreal.
Given the new numbers, most economists say the Bank of Canada will hold the interest rate steady at 1.75 per cent at its next announcement on Sept. 4. According to Bloomberg, the probability of a rate cut stands at 10.7 per cent.
Mr. Reitzes thinks the bank will hold steady for its September announcement, but said it will likely cut rates in October if the “global backdrop” of trade uncertainty doesn’t improve. Stephen Brown, senior Canada economist with Capital Economics, also predicts an interest-rate cut in October.
But Royce Mendes, senior economist with CIBC Capital Markets, said the bank won’t cut interest rates until next year.
Over all, energy exports in the first half of the year were up. They led growth in the second quarter, jumping 5.9 per cent through the three months ending in June, helped by higher prices for Canadian crude oil and bitumen.
That’s a reversal of the weakness in the last half of 2018, when Alberta production curtailments and extremely low prices for Canadian crude “weighed heavily on the sector,” Mr. Reitzes said.
Canada also exported more fish, farm products, minerals and aircraft parts. Pulp and paper exports dropped though, continuing the trend for that sector over the past nine months.
Leading economists caution Canada won’t be able to maintain the growth of the second quarter.
Mr. Brown said temporary factors drove this quarter’s surge, such as the grounding of Boeing’s Max 737 contributing to a drop in aircraft-related imports.
“Given the China-U.S. trade war that’s going on, and global uncertainty on the trade front, it’s difficult to see exports providing this type of gain on a consistent basis,” Mr. Reitzes added.
Domestic weakness is also dampening economists’ outlooks.
Household consumption slowed, and domestic demand fell by 0.7 per cent in the second quarter. Business investment also slid 16.2 per cent. Mr. Reitzes also said he expects record-high household debt levels to constrain spending for the foreseeable future.
But there are also some encouraging signs, according to senior economist Krishen Rangasamy with the National Bank of Canada. Single housing starts are up, which suggests an uptick in residential investment may continue, he said in a research note.
Mr. Rangasamy predicted Canada’s GDP will grow 1.5 per cent by the end of 2019.
Canada’s unexpectedly strong performance stands in contrast with the United States, which on Thursday announced its GDP grew by an annualized 2 per cent in the second quarter.