Almost as soon as Canada's July gross domestic product numbers came out Monday morning, economists were dismissing their significance. The booming 0.6-per-cent growth surge in the month merely confirmed that the country bounced back from the temporary economic impediments that dragged June down, they said – while cementing the likelihood that the economy will fall miles short of the Bank of Canada's wildly optimistic third-quarter growth expectation.
Far be it from me to paint myself as a glass-half-full kind of guy, but why all the long faces over such a happy number? Don't take my word for it; none other than Bank of Canada Governor Stephen Poloz said in a speech two weeks ago that he thinks the economy "may be turning the corner." Doesn't July's strong rebound back up his confidence?
Not many Bay Street economists seem to think so. They point out that because of the economic slump in June, the third quarter started in a deep hole; With July's rebound from June's Quebec construction strike and Alberta floods now out of the way, we'll likely return to a more typical recent growth pace (say, 0.2 per cent monthly, roughly the average of the five months prior to June). And that points to third-quarter growth, annualized, of 2 per cent to 2.5 per cent – nowhere near the 3.8 per cent the central bank predicted in its mid-July monetary policy report.
Yes, the Bank of Canada's target looks like a stretch. But maybe not as much of a stretch as some pundits are suggesting.
First, consider that when the Bank of Canada initially made its 3.8-per-cent forecast for the third quarter, it also estimated second-quarter growth at an annualized 1 per cent. In fact, second-quarter GDP growth came in at a 1.7-per-cent pace. That, in effect, gives the third quarter a head start to reach the same absolute level of GDP in the third quarter that was envisioned in those July BoC forecasts. Together with the strong July result, the economy would need month-to-month GDP growth of a little over 0.4 per cent in each of August and September to hit the bank's target.
That's hardly far-fetched – and not nearly as far-fetched as the view, implicit in many third-quarter GDP estimates (but not the Bank of Canada's), that the bounce-back from June was neatly contained within a single month. When July began, the flood waters in Alberta had barely receded. Alberta's enormous cleanup and rebuilding job – which represents a tremendous amount of economic activity and a positive net boost to GDP – had barely gotten started; rebuilding activities may very well have accelerated in August and September, as additional funds from insurance claims and government assistance programs came through. The contribution to GDP was far from done in July.
Now take a look at the August economic indicators that we have already seen. The Ivey Purchasing Managers' Index rose to 51 from 48.4 in July, indicative of an expansion in business activity. The labour force survey showed a surge of 59,000 jobs, a sharp rebound from July's 39,000-job slump. Home prices, existing-home sales and consumer confidence all showed solid gains. The only significant disappointment has been in housing starts, which dipped to 180,000 from 193,000 – a significant decline, but still a pretty healthy level.
There are a lot more August numbers still to come, among them some key trade and housing reports next week. But based on the early evidence, August definitely has the potential for an upside surprise. And a strong August would put the economy much closer to the Bank of Canada's prescribed economic course than a lot of doubters are willing to believe.