The Canadian economy grew at a faster-than-expected annualized pace of 2.1 per cent in the second quarter of the year, but early indications point to a loss of momentum going into the third quarter.

The rise in gross domestic product (GDP) was driven by growth in government spending and business investment, data released Friday by Statistics Canada showed. It beat the Bank of Canada’s forecast of 1.5 per cent and those of financial institutions, whose forecasts varied, with Royal Bank of Canada initially predicting 1.4 per cent growth and the Canadian Imperial Bank of Commerce forecasting 1.9 per cent.

Though growth was “modestly” better than expected, Andrew Grantham, an economist with CIBC Capital Markets, said momentum heading into the third quarter is weak with early estimates at 0.5 per cent annualized.

“Because of that we still see the Bank of Canada reducing interest rates by 25 basis points at each remaining meeting this year,” he said in a note after the data was released.

Per-capita GDP, which takes into account changes in population, fell by 0.1 per cent, a fifth consecutive quarterly decline, Statistics Canada said Friday.

Business investment in equipment and machinery increased by 6.5 per cent in the April-to-June period. Government spending was also a contributor to growth, increasing by 1.5 per cent as compensation and hours worked by employees rose.

“Details are not as strong as the headline number, by our count a surge in government spending accounted for 80 per cent of the second quarter GDP increase,” said Abbey Xu, economist at the RBC, in a note to clients.

Exports of goods and services fell by 0.4 per cent in the second quarter, driven by lower exports of metals, refined petroleum products and passenger vehicles and light trucks. The declines were slightly offset by higher exports in crude oil and bitumen.

Investment in housing construction was down 1.9 per cent, the largest decline since the first quarter of 2023. The decline was driven mainly by decreases in the resale market in Ontario and lower construction investment. Residential construction has fallen in eight of the past nine quarters.

Household spending slowed in the second quarter to 0.2 per cent, after gains of 0.9 per cent during the first quarter. Population increases outpaced increases in household spending; as a result, per-capital household expenditures declined by 0.4 per cent, after gains in the previous quarter. At the same time, the household savings rate rose to 7.2 per cent, as disposable income outpaced consumption.

“These savings are likely still heavily concentrated among higher-income households and are unlikely to be spent in the near term,” said Xu.

Overall compensation for employees also rose in the second quarter by 1.6 per cent, thanks to increased wages in health care, social assistance, educational services, finance and insurance. Wages in the oil and gas and mining sectors increased the most by 5.6 per cent. Corporate income also rose by 3.1 per cent during the second quarter, after declining in the previous quarter.

On a monthly basis, economic growth remained unchanged in June, after a 0.1 per cent increase in May. Manufacturing declined by 1.5 per cent and wholesale trade fell for the second consecutive month.

Advance estimates for July put GDP by industry unchanged from June, with Statistics Canada citing declines in the construction, mining, quarrying, and oil and gas extraction and wholesale trade sectors. A more detailed report will be issued in September.

“This is a clear case of there being less than meets the eye for growth. While the headline advance of more than two per cent for the second quarter is certainly welcome, it comes with a wide variety of ‘Yes, buts,’” said Douglas Porter, chief economist at the Bank of Montreal, in a note to clients. “Briefly, the growth relied heavily on government spending, it still marked a drop in per capita terms, and the flat June/July readings give a weak handoff to third quarter.”

Growth for the third quarter is on track to come well below the Bank of Canada’s forecast of 2.8 per cent. Porter says “that now looks nearly unachievable, with labour disruptions also weighing in late summer.”

Cited from: Financial Post