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Container ships are loaded and unloaded in Delta, B.C.

Lyle Stafford/The Globe and Mail

Business investment buoyed Canada's gross domestic product in the second quarter, allaying fears about Bank of Canada Governor Mark Carney's charge that corporate Canada is sitting on piles of "dead money."

GDP rose by 0.5 per cent in the second quarter to 1.8 per cent on an annual basis, largely on the back of business investment and rising inventories, according to Statistics Canada. Business investment rose 2.3 per cent in the quarter. But exports slowed to 0.2 per cent, lagging overall growth.

Following a speech to the Canadian Auto Workers last week, Mr. Carney said that with hundreds of billions of dollars in their bank accounts, Canadian firms are not doing enough to drive economic growth and create new jobs.

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Despite the increase in investment in the second quarter, however, Canadian corporations are continuing to build their "cash stash," said Erin Weir, an Economist & Research Associate at the Canadian Centre for Policy Alternatives. He pointed to Statscan figures that show private non-financial corporations deposited $23-billion in Canadian and foreign currency during the quarter.

And companies may be discouraged by the weak outlook. The GDP boost from rising inventories in the second quarter will serve as a drag on production in the third quarter, said Krishen Rangasamy of National Bank Financial, cautioning that exports may continue to show weakness.

"Trade is unlikely to provide much of an offset to the soft domestic economy, with our main market, the U.S., seemingly destined for a sub-2-per-cent growth environment for the next little while," wrote Mr. Rangasamy, following Friday's release.

Federal Finance Minister Jim Flaherty noted Friday that Canada has "recovered and exceeded all of the output and all of the jobs lost during the recession," and that Canada's GDP recovery has been the best of the G7 countries.

But Mr. Flaherty said the possibility of a "serious world economic crisis arising out of the European situation or something else" remains "the major downside risk" for the economy. While his European colleagues are optimistic about a recovery, Mr. Flaherty said "I'll believe it when I see it."

Ottawa posted a deficit of $1.1-billion in June, down from $2.3-billion during the same month a year earlier. Increased personal income tax revenue was the largest driver contributing to a $800-million increase in revenues. Program expenses, including transfer payments, dropped $200-million, a reversal from the previous report which saw expenses rise by 3.4 per cent in April and May.

At a press conference in Toronto on Friday, Mr. Flaherty said the results are "broadly consistent" with the Conservative government's predictions. He said Canada is "broadly on track" to reduce the federal deficit, but that "the concern is the downside risk going forward later in the year."

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Mr. Flaherty would not speculate on allowing the deficit to increase through spending if the global economy takes a turn for the worse – but he said "what has been done before can be done again" and that "our government's primary focus is, and will remain, the economy and jobs."

GDP rose 0.2 per cent in June, contributing to the stronger-than-expected quarterly expansion.

"The Canadian economy did slightly better than expected in the second quarter," wrote Bank of Montreal deputy chief economist Douglas Porter, following Friday's release, "but the pace was still nothing to write home about."

Mr. Porter cited factors including reduced oil output and a rail strike. In May, Canadian Pacific Railway Ltd. briefly halted freight deliveries across the country before the federal government ordered workers back on the job.

Though the factors behind the softness were temporary, Mr. Porter predicted similar growth – 1.7 per cent – in the third quarter.

"Don't expect much of a bounce" for the third quarter, wrote Mr. Porter. "The main point is that Canada is now expanding no faster than the U.S., and is growing below potential, by any reasonable metric."

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