In the slow lane: Canada's economy grew 0.2 per cent in May

OTTAWA – A steep drop in oilsands activity restricted Canada’s economy to a disappointing 0.2 per cent advance in May, diminishing prospects for what many hoped would be a more robust second quarter.

In general, economists had expected a 0.3 per cent pickup from April — with some pencilling in 0.4 — based on previously reported strong indicators.

But analysts had not counted on a 7.4 per cent dip in oilsands output, following a similar sag in April. The sector as a whole fell 2.2 per cent, causing a negative 0.3 per cent overall reading on the goods producing segment of the economy.

Growth was rescued by a strong, and likely unsustainable, 0.5 per cent spurt in the services sector.

“The economy is just grinding ahead and I don’t see a break-out one way or the other any time soon,” said Doug Porter, chief economist with BMO Capital Markets.

“If the U.S. economy really does pick up steam in the second half of the year, and there are still compelling reasons to believe that is going to happen, that could help pull Canada out of the doldrums.”

Analysts attributed weakness in the oil and gas sector to supply line bottlenecks and maintenance shutdowns at some facilities, but noted that the consumer cannot be counted on to continue as a major driver of growth given the current historically high levels of household debt.

CIBC economist Avery Shenfeld noted that the wholesale and retail sectors were healthy, as expected, but factory output rose a bit less than anticipated.

“We had been moving up our Q2 growth forecast as results rolled in for May, but this report will likely reverse those revisions. June will be a wildcard, as it will be swamped by the Calgary flood impacts,” he said.

Earlier in the month, the Bank of Canada had predicted a soft one per cent growth rate for the second quarter as a whole, judging that June’s Alberta floods and Quebec construction strike would chop about 1.3 percentage points from what might have otherwise been a decent performance. The TD bank said the shocks could result in a 0.4-0.5 per cent contraction in the last few weeks of the quarter.

Still, most analysts say the central bank is too pessimistic and that the April-June period will average around 1.5 per cent.

Going forward, the third quarter could be held back by negative developments in the world potash trading sector, which may delay what the Bank of Canada anticipates will be a positive turning point in the economy.

Canada’s lacklustre report for May was aided somewhat by better than expected numbers south of the border, with U.S. gross domestic product growth coming in at 1.7 per cent for the quarter — a good result given the negative impact of government cutbacks — and a preliminary job creation estimate of 200,000 for July.

As well, the more precise number in Canada was 0.24 per cent, meaning the performance was closer to analyst expectations than the headline suggests.

The loonie initially slid 0.13 of a cent on the Canadian report, but recovered all the losses and was moderately stronger by mid-morning to 97.25 cents US.

With Canada’s housing sector at its cycle peak, consumers highly indebted and governments cutting back, economic bulls such as the Bank of Canada are counting on a surge in exports feeding growing demand in the United States to become the mainstay of the Canadian recovery going forward. The better than expected gross domestic product number in the second quarter gives some support to the analysis, although economists say the U.S. will need to pick up the pace to well above three per cent for Canada to receive a significant boost.

With the impacts of the U.S. government’s sequester cutbacks receding, “We expect U.S. economic activity to accelerate in the second half of the year which will support a stronger growth profile for Canada,” said TD economist Jonathan Bendiner.

But not all agree. Capital Economics said on Tuesday that whatever export boost Canada receives won’t be sufficient to compensate for the slowdown in domestic spending that all analysts expect, particularly in the housing sector. Rather than growing, the forecasting firm says Canadians should expect weaker growth to about one per cent for the next six quarters.