‘It’s a jawdropper:’ Canada’s economy shrinks in the second quarter in shocking miss

First contraction since the depths of the pandemic last year

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Canada’s economy contracted in the second quarter, a decline that came as a shock to observers, as the country contended with a third wave that shuttered businesses, limited exports and reduced housing activity.

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Statistics Canada reported Tuesday that gross domestic product declined at an annual rate of 1.1 per cent in the three-month period, the first contraction since the second quarter last year. The decrease follows a disappointing first quarter.

Economists had predicted GDP would rise 2.5 per cent in the second quarter, in the second wide miss this year. The consensus for the first-quarter had forecasted growth to be at seven per cent, but it came in at  5.6 per cent.

“It’s a jaw-dropper,” BMO chief economist Douglas Porter told Reuters. “Completely different from what Statistics Canada was estimating and what every economist was predicting… It reflects that Canada went through some restraints in Q2 – simply put, more of the spending went into rising prices and rising volumes.”

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The federal agency reported that a decline in housing resale activities and export sectors caused growth to contract. Increases in investment in business inventories, government final consumption expenditures, business investment in machinery and equipment, and investment in new home construction and renovation were not enough to offset the declines.

Though the report focuses on Canada’s output in the second quarter, many economists had their eyes on the preliminary July estimate in hopes of getting a sense of how well the economy responded to broader business openings amid lifting health restrictions. The early figure shows July GDP dropped 0.4 per cent, with declines in retail trade, manufacturing and construction being the biggest contributors to the drop.

The quarterly report clashes with Bank of Canada’s projections, which forecast two-per-cent growth for the second quarter.

Additional reporting by Reuters

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