Boom ends, as Canada’s economy shrank in August

OTTAWA — Canada’s growth spurt is over.

GDP unexpectedly contracted in August, Statistics Canada reported Wednesday, after a flat reading in July. The latest disappointment adds to signs the process of cooling is well underway, from the blistering pace of growth in the 12 months through June.

“The run of amazing Canadian economic data is officially over, with growth coming back to reality in hurry,” Doug Porter, chief economist at Bank of Montreal, wrote investors. “The two-month lull in activity pounds home the point that the frothy growth of the past year is over and done.”

If the economy fails to expand in September, third-quarter annualized growth would be on pace for a sub-two per cent increase — after a gain of 4.5 per cent in the second quarter. The Bank of Canada projects growth of 1.8 per cent in the third quarter. Economists surveyed by Bloomberg News forecast an average 2.1 per cent expansion in the second half.

The report fuels concern the Bank of Canada’s may not raise interest rates again.

It’s been quite a ride, much of it unexpected. Excluding inflation, Canada’s economy grew by 4.2 per cent in the second quarter from a year earlier, a pace not seen since 2000. Employers added 312,700 jobs over that time.

Even with an anticipated second-half slowdown, Canada is headed for more than three per cent growth for all of 2017. That would end a five-year stretch of sub-three per cent readings that’s already tied as the longest on record in data back to 1926.

Most forecasters, including the Bank of Canada, expect growth to slow to below two per cent by 2019.

A global recovery and rising world trade volumes are backstopping growth, along with the bottoming out of the oil shock in western Canada and soaring home prices in Toronto and Vancouver. Government policy has also helped. Federal deficit spending, particularly the enhanced child benefit system, has supercharged consumption.

Policy-makers will welcome a second-half slowdown as a preventive to overheating and rapid borrowing-cost increases. The Bank of Canada is moving to bring borrowing costs to more normal levels, with two rate hikes since July. The trick is to prevent the slowdown from gaining momentum in the other direction, especially with a number of potential headwinds on the horizon, such as a possible collapse of NAFTA.

Weakness is particularly evident in the trade sector. Canada’s exports have fallen steadily since reaching a peak in May.