Canadian Economy Contracts in Q2, Housing Investment Continues to Fall

Weaker GDP Growth in First Quarter Revised Down to 2.6%

The Canadian economy experienced a contraction in the second quarter, with Statistics Canada reporting an annualized rate of -0.2%. This downturn follows a revised growth rate of 2.6% in the first quarter, down from the previously reported 3.1%. Several factors contributed to this contraction, primarily a decline in housing investment, including an 8.2% drop in new construction and a 4.3% decrease in renovation spending.

The reduction in spending on housing is partly attributed to higher borrowing costs caused by interest rate hikes by the Bank of Canada. The central bank is aiming to bring inflation back to its target of 2%, and these rate hikes have had an impact on consumers' ability to invest in housing.

Additionally, the weakness in the second quarter can be attributed to lower inventory accumulations, slower growth in exports, and a slowdown in household spending. Exports of goods and services only increased by 0.1% in the second quarter, compared to a 2.5% increase in the first quarter. Real household spending growth decelerated to 0.1% in the second quarter, down from 1.2% in the first quarter.

Despite the central bank's expectations of 1.5% annualized GDP growth and analysts forecasting a 1.2% gain, the actual contraction in the second quarter came as a surprise. Some experts suggest that the central bank should hold off on further rate hikes, as it appears that their monetary policy tightening has led to a slowdown in consumer spending.

Construction, particularly in the high-rise sector, has seen a reduction in activity due to higher interest rates. Projects that were scheduled to start soon have been delayed, and some industry professionals point to a cautious approach as financing is often tied to property sales, which are currently down.

Business investment in non-residential structures did see some growth, with a 2.4% increase in the second quarter, driven by a 3.3% gain in spending on engineering structures. However, the overall economic pullback in the second quarter was compounded by a 0.2% contraction in services-producing industries and a 0.4% decline in goods-producing industries in June.

Statistics Canada's early estimate for July suggests that real GDP was essentially unchanged for the month, with further updates expected. This report comes ahead of the Bank of Canada's upcoming interest rate decision, set for the next Wednesday. In July, the central bank raised its key interest rate target to 5%, expressing concerns about progress toward its 2% inflation target.