Con­sumer wor­ries cloud best Cana­dian out­put gain in two years

The Prince George Citizen - - Money - Theophi­los ARGITIS Bloomberg

Canada’s econ­omy recorded a stronger-than-ex­pected re­bound in the sec­ond quar­ter as ex­ports re­cov­ered, but sur­pris­ingly weak con­sump­tion and busi­ness in­vest­ment will cast doubts on the ex­pan­sion’s sus­tain­abil­ity.

Out­put grew at an an­nu­al­ized pace of 3.7 per cent in the three months through June, Sta­tis­tics Canada said Fri­day in Ot­tawa, up from a pal­try 0.5 per cent in­crease in the first quar­ter. The re­bound fol­lows two straight quar­ters of hardly any growth. The pe­riod also ended bet­ter than ex­pected, with a monthly ex­pan­sion of 0.2 per cent in June.

The un­der­ly­ing de­tails, how­ever, were less im­pres­sive. The re­bound was driven by the fastest quar­terly in­crease in ex­ports since 2014, but growth in house­hold con­sump­tion came to a near halt de­spite strong gains in in­comes, and busi­ness in­vest­ment shrank by the most in more than two years. As a re­sult, do­mes­tic de­mand con­tracted in the sec­ond quar­ter.

That could be a sig­nal of grow­ing un­ease among house­holds and busi­nesses about global eco­nomic con­di­tions, fu­eled by con­cerns over the U.S.-China trade war and po­ten­tially fore­shad­ow­ing a sharper slow­down in the sec­ond half of the year. Pol­i­cy­mak­ers at the Bank of Canada may look through some of the strength in the re­port.

“This was a ‘less than meets the eye’ re­port,” Brian DePratto, se­nior econ­o­mist at Toron­toDo­min­ion Bank, said in a note to in­vestors.

“Not only were today’s de­tails weak, but since the sec­ond quar­ter ended we’ve seen yet another es­ca­la­tion in the trade wars and as­so­ci­ated un­cer­tainty.”

Pos­si­bly re­flect­ing con­cerns about the out­look, busi­nesses met some of the pickup in for­eign de­mand by draw­ing down in­ven­to­ries, rather than boost­ing pro­duc­tion. The strong gain in ex­ports, mean­while, is seen as only tem­po­rary, re­flect­ing a ramp­ing up of ship­ments after a slug­gish win­ter. Ex­ports had slumped sharply ear­lier this year be­cause of cur­tail­ments on oil pro­duc­tion and other tem­po­rary is­sues, prompt­ing many busi­nesses to stock­pile.

DePratto said he ex­pects the Bank of Canada to join the global trend to­ward eas­ing mon­e­tary pol­icy in Oc­to­ber, an in­creas­ingly likely sce­nario ac­cord­ing to swaps trad­ing. A sec­ond cut is be­ing priced in by in­vestors some­time next year. The next rate de­ci­sion is Sept. 4, when pol­icy mak­ers aren’t ex­pected to move but will likely strike a more dovish tone. Fri­day’s GDP num­bers beat the bank’s 2.3 per cent fore­cast, and economists had pre­dicted a 3 per cent in­crease.

The stronger-than-ex­pected head­line fig­ure boosted the Cana­dian dol­lar. The loonie was up 0.2 per cent to C$1.3255 per U.S. dol­lar at 10:04 a.m. in Toronto.

De­spite the wor­ry­ing de­tails, the Cana­dian eco­nomic ex­pan­sion in the sec­ond quar­ter was still im­pres­sive – grow­ing the most in two years at eas­ily the fastest pace in the Group of Seven. The U.S. econ­omy ex­panded by an an­nu­al­ized two per cent over the same pe­riod. Ship­ments by Cana­dian ex­porters rose at a 13 per cent pace, con­tribut­ing more than four per­cent­age points to growth. A drop in im­ports also added to the ex­pan­sion, as more of the na­tion’s de­mand was used to buy do­mes­ti­cally pro­duced goods and ser­vices.

Hous­ing in­vest­ment, mean­while, recorded its first gain in six quar­ters.

AP FILE PHOTO

A shop­per car­ries bags full of cloth­ing pur­chases. Canada’s econ­omy was stronger than ex­pected in the sec­ond quar­ter of the year, but con­sumer con­fi­dence re­mains low.

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