Canada’s economic growth comes in stronger than expected

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The twenties have yet to roar as many predicted they would, but high vaccination rates appear to have delivered a decent rate of economic growth this summer.

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Statistics Canada reported on Oct. 1 that gross domestic product dropped 0.1 per cent in July, an improvement on the agency’s preliminary estimate, which had foreshadowed a 0.4-per-cent decline. Thirteen of the 20 industrial sectors that Statistics Canada monitors posted gains, led by hotels and restaurants, which posted double-digit growth for the second consecutive month.

To be sure, the rush of Canadians back to their favourite eateries and vacation destinations wasn’t enough to offset the struggles of a handful of important industries. Construction activity stumbled, but from record levels. Manufacturing declined, as automobile and auto-parts makers struggled to gather parts amid post-pandemic supply shortages. Farmers on the Prairies, who last year benefited from surging commodity prices, are now coping with the effects of a major drought.

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Still, the economy appears to have pushed through those headwinds. Statistics Canada’s flash estimate of GDP in August suggests the economy rallied, growing 0.7 per cent. That would be a strong result, as Canada’s economy tends to grow at a monthly rate of about 0.2 per cent, the average in data that date to 1997. It would also put the economy on track to outpace the Bank of Canada’s muted expectations for the third quarter, suggesting policy-makers will continue with plans to reduce their purchases of federal debt as early as the end of the month.

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“Today’s GDP report provides a small tonic to the troubling results from a month ago,” Douglas Porter, chief economist at Bank of Montreal, wrote in a note to his clients. “The slightly smaller-than-expected setback in July and nice pop in August suggest that the economy managed to grind out some moderate growth in the summer quarter as a whole.”

The economy contracted in the second quarter, a setback that few saw coming at the start of the year. The latest GDP readings indicate the economy will avoid a double-dip recession, as the economy appears to have enough momentum to avoid a second consecutive quarterly contraction.

“Further reopening across the country fuelled a very strong rebound in high-touch services,” said Sri Thanabalasingam, an economist at Toronto-Dominion Bank. “This strength continued into August and is a key reason for Statistics Canada’s healthy flash GDP estimate for that month.”

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The recovery is now being powered by a different set of engines, as providers of services take over from producers of goods. The output of restaurants and bars increased 9.5 per cent from June, while accommodation services surged 21 per cent, as the federal government eased restrictions on international travel. The arts and recreation sector also rallied, as gyms, yoga studios, and amusement parks were allowed to reopen. 

“Services activity remains strong and is an encouraging sign for underlying demand,” said Veronica Clark, an economist at Citigroup Global Markets Inc.

The production side of the economy — home to the stars of the early phase of the recovery — had a tougher summer.

Crop production, excluding cannabis, plunged 13.2 per cent in July, dropping returns to their lowest level since the autumn of 2007, as severe drought dried up valuable fields of canola and wheat, Statistics Canada said. Forestry and logging fell almost four per cent as forest fires burned through parts of British Columbia and Ontario.

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Residential construction fell for a third consecutive month after touching a record in April. The surge in real-estate prices that came with the pandemic appears to be weighing on demand by making homes too expensive for most buyers. A spike in wages for construction workers also implies the pool of contractors was too small to keep up with the growth that the industry was experiencing earlier this year.

Indeed, supply constraints will continue to test the economy over the rest of the year. Vacancy rates are at record levels, even tough unemployment rates remain elevated, suggesting a mismatch in the skills needed and the talent available. Elevated commodity prices, shortages of key inputs, and transportation bottlenecks continue to wreak havoc on global manufacturing and threaten to put upward pressure on inflation.

“Much of the low hanging fruit in terms of the near-term growth recovery is being picked,” said Claire Fan, an economist at Royal Bank of Canada. “Further increases will be harder to come by – particularly into next year as inflation concerns replace growth worries and central banks start to think more seriously about moving interest rates off of exceptionally low current levels.”

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