Canada’s economy is really overachieving right now - Macleans.ca
 

Canada’s economy is really overachieving right now

Econ-o-metric: GDP soars 4.5% in second quarter, boosting interest rate hike expectations further


 
Some economists bet red-hot economy will convince Bank of Canada Governor Stephen Poloz to hike rates next week.

Some economists bet the red-hot economy will convince Bank of Canada governor Stephen Poloz to hike interest rates next week. (Adrian Wyld/CP)

Eat your heart out, Donald Trump.

The U.S. President ascended to the White House on the promise he would deliver annual growth of four percent. We’re still waiting. But up in Canada, growth in Prime Minister Justin Trudeau’s economy surged to an annual rate of 4.5 percent in the second quarter, according to Statistics Canada.

What it means

The latest growth figures are too good to be true —demographics, weak productivity, heavily indebted consumers, and rising interest rates will constrain Canada’s economic growth eventually. But for now, the economy continues to exceed expectations, suggesting the combination of fiscal stimulus and ultra-low interest rates finally jolted Canada’s economy out of a multi-year malaise.

The trend

The second-quarter growth rate was the fastest since the third quarter of 2011 and significantly stronger than most forecasters had anticipated. The Bay Street consensus was a growth rate of around 3.7 percent, while the Bank of Canada in July predicted an annualized advance of only 3.4 percent. Even if economic output slows in the second half of the year, Canada’s gross domestic product is on track to expand at least three percent in 2017. It’s been five years since Canada’s economy has hit that mark, one of the longest stretches of economic mediocrity on record, according to Bloomberg News.

Glass Half Full

There is lots to like in the latest GDP figures. Exports of goods and services were the biggest contributor to growth, advancing 2.3 percent from the previous quarter, the biggest increase in three years. Bitumen and natural gas led the increase, even as prices fell from earlier in the year. But for the first time in a long time, Canada’s trade story is bigger than energy. International shipments of industrial equipment, for example, surged 8.2 percent from the first quarter, matching the biggest increase since early 2000.

GDP-Chart1

A few more things stand out. Non-residential business investment grew for the third time in four quarters, after declining for seven consecutive quarters starting at the end of 2014. And the household saving rate rose to 4.6 percent from 4.3 percent in the first quarter, as disposable income grew slightly faster than spending. That’s a drag on growth, but a welcome one if it means households have begun doing something about record levels of debt.

Glass half empty

One of the reasons these extremely good times can’t last is that most households simply aren’t being paid enough to go on driving economic growth as they have in recent years. Compensation rose 0.8 percent in the second quarter, compared with quarterly gains of one percent in the first quarter and 1.2 percent in the fourth quarter.

The GDP data also highlight a reason why Canada will struggle to compete in a global economy dominated by the advances in technology. Businesses increased spending on intellectual property by 2.1 percent this spring, the second consecutive quarterly increase. StatsCan presented this as a turnaround, which could be true. But it’s a turnaround from a long period during which investment in intellectual property was exceptionally weak.

GDP-Chart2

Bottom line

There is good reason to wonder about Canada’s economy strength over the medium term, but 4.5 percent growth is 4.5 percent growth. Within a couple of hours of the release, some on Bay Street were shifting their predictions of when the Bank of Canada will next raise interest rates to next month (the scheduled date for any changes is Sept. 6) from October. The central bank cares mostly about inflation. In July, it said the economy was on track to exceed its non-inflationary speed limit by the end of year. But with the economy growing so much faster than projected, policy makers may well feel compelled to advance their plans to raise interest rates in order to keep up.

MORE ABOUT GDP:


 

Canada’s economy is really overachieving right now

  1. Tsk….and after all the Cons assuring us we were bankrupt and about to be repossessed.

    And this after the oil crash.

    • Emily-your lack of knowledge is showing again. The GDP % change is for the second quarter of 2017 compared to the second quarter of 2016. Crude oil price a year ago was $29. Now it’s $47. That change is a major reason the GDP increased. Sure nothing to do with Mr. Selfie in Ottawa or his fritter our tax dollars away bent.

      • The IMF says Canada is booming….sorry Jerome

        • Booming verses a quarter a year ago when crude oil prices were in the toilet. All the IMF looks at is quarter over quarter data as well. I’ll bet big $ that the GDP growth published next quarter will tell a truer story.
          You realize the only stimulus surfer dude has is infrastructure spending and he’s at 1/3 the spending level Harper was at. In spite of this he is currently increasing our debt to unprecedented levels. His old man did the same thing and left us with 18% mortgage rates.

  2. In the changing global economy, all countries should be wary of their economic prospects, medium and longer-term. However, one thing that can’t be denied by the naysayers is that Canada is finding itself again after the dark decade and we are in it for the good effort.

  3. A housing bubble and massive deficit spending are pulling future growth forward to today. This is both unsustainable and unwise, because the borrowed money and the Ponzi money are not being invested wisely.

    • The IMF says we’re booming……sorry

      • Stay tuned for a collapse. I’d really like to see our economy to flourish as well. But there has to be better ways than having a recovery from an oil crash and our central bank arbitrarily holding our $ down to boost manufacturing exports by having a huge gap with the U.S. on interest rates

        • Would you take me back two years and give me a summary of what you would have predicted about the state of the economy after two years of a Trudeau government?

        • AHAHAHA…..so when we’re up, we’re still down eh?

          Oil has nothing to do with it, I’m afraid

          Harp had 2 recessions and Justin has a boom, but somehow Trudeau has still gotta be wrong?

          This is the kind of partisan nonsense we get when school drop-outs try to tell economists how to run the world.

          • Trudeau has not done one thing to boost GDP. He can’t even get his infrastructure spending launched-the only GDP booster in his policies!! The Bank of Canada, which is independent of Mr. Selfie, is the gang who has kept interest rates low to encourage more manufacturing exports
            but this is costing Canadian consumers $300 billion/year more for the higher cost of goods imported.
            And if you think Harper caused the banking fiasco in the U.S. which led to a worldwide recession-you’re back on your bong again Emily.

        • The bank is holding interest rates down because inflation is low and we are not at full employment. The Bank doesn’t lower interest rates to help manufacturing. As usual, there are a bunch of factors involved. The government deficit helps growth – tough to argue government spending is crowding out private investment when interest rates are in the toilet. A weak dollar helps exports and investment including investment in oil and gas, manufacturing and housing to name a few. Housing is a problem as is personal debt. Governments have been tightening housing markets – they may need to do more. Interest rates should start to rise as inflation starts up. But there is the rub – wage inflation here and around the world is going nowhere. So interest rates here and everywhere are very low. Our experience is little different from Australia, who like us depend on resource exports. A small open economy like ours has few options. I don’t know what great policy options are out there to make much difference. As for next quarter, well misery in Houston is our gain. Not something to brag about, of course, but higher oil prices will help refiners and producers here. Won’t help consumers much, of course.

    • Spot on comment!!

  4. Last December every media outlet carried a story with the headline “Canadian economy to see first effects of Trump presidency in 2017”.