Economy posts surprise Q2 contraction

Data drops amid federal election campaign

OTTAWA — Canada's economy unexpectedly shrank in the second quarter, while a likely contraction in July will leave economic activity about two per cent below pre-pandemic levels, data showed on Tuesday, with the dire results landing during the election campaign.

The Canadian economy shrank 1.1 per cent in the second quarter on an annualized basis, Statistics Canada

said, far below analyst expectations of a gain of 2.5 per cent. It was the first quarterly contraction since the second quarter of 2020.

The economy most likely contracted 0.4 per cent in July, Statcan said in a preliminary estimate, following a 0.7 per cent gain in June, which was in line with analyst expectations.

"It seems that the Canadian economy wasn't on as strong a footing as we had believed," said Royce Mendes, senior economist at CIBC Capital Markets.

"And with the fourth wave now seemingly here, the economy faces another storm to navigate through."

Canada is grappling with a rising fourth wave of COVID19 infections, mostly among the unvaccinated. The United States added Canada to its "do

not travel" advisory list on Tuesday due to the ongoing pandemic.

Canadians are set to go to the polls on Sept. 20, with Liberal Prime Minister Justin Trudeau trailing his main rival, Conservative leader

Erin O'toole, in opinion polls.

Statcan said the secondquarter drop was mostly driven by declines in home resale activities and exports. Housing investment boomed during the pandemic, running far above the five-year average in the previous four quarters.

The quarterly contraction was far below the Bank of Canada's July forecast of a 2.0 per cent gain on an annualized basis, though analysts were mixed on whether it would affect an expected tapering of the bond-buying program later this year.

"(The Bank of Canada) is also dealing with the highest inflation in a decade and I suspect they will keep pushing ahead with (quantitative easing) tapering, but it will be a big debate," said Doug Porter, chief economist at BMO Capital Markets.

The Canadian dollar initially gave up its earlier gains to trade 0.1 per cent lower at 1.2612 to the greenback, or 79.29 U.S. cents.

REUTERS Statistics Canada said the second quarter saw declines in home resale activities and exports.