Why Canada’s economy was so ‘ugly’ in the second quarter
Statistics Canada says real gross domestic product fell at an annualized rate of 1.6 per cent.

thestar.com
By Sunny Freeman
Aug. 31, 2016

The Canadian economy shrank 1.6 per cent in the second quarter, with Alberta’s wildfires taking much of the blame for the poorest quarterly performance since the Great Recession.

Statistics Canada said Wednesday real gross domestic product declined by an annualized 1.6 per cent from April to June, slightly more than the 1.5 per cent economists had expected. That was the largest quarterly decline since the second quarter of 2009, when the country was grappling with the fallout from the global financial crisis.

“We knew for the past four months that today’s GDP report was going to be ugly, and it delivered with a capital U,” BMO chief economist Douglas Porter wrote in a note.

The decline was much worse than the 1-per-cent contraction the Bank of Canada had predicted in its June monetary policy report.

The story behind the headline number was largely due to the 16.7 per cent annualized drop in exports, a big part of that being the decline in oil output and exports. Production in Canada’s oilsands was halted after forest fires ravaged Fort McMurray, Alta. in May.

That natural disaster alone is estimated to have shaved about two percentage points from GDP during the quarter.

However, the oil sector is not solely responsible. The decline in exports was widespread across most categories - amounting to the largest drop in exports since 2009.

Exports of vehicles and parts were down a quarterly six per cent, while consumer goods exports fell nearly seven per cent, the largest drop in 13 years.

“This wasn't only the story of the Alberta fire, as excluding its hit, GDP would still have been running at a roughly ½ per cent annualized rate (i.e. quite slow, if not negative),” said CIBC chief economist Avery Shenfeld.

Exports would have been diving regardless of the wildfire, he said. One reason is the lacklustre performance of the U.S. economy in the first half of the year (GDP there grew 1.1 per cent in the second quarter). Canada’s largest trading partner, he noted, entered the quarter with a build-up of vehicles, machinery and chemicals, reducing the need to import those key Canadian export items.

The outsized toll exports took on economic growth shows how important the sector is to Canada’s economy. The Bank of Canada and economists had anticipated that the nosedive the Canadian dollar took, along with the plunge in oil prices, would help encourage an economic shift away from reliance on oil exports towards manufactured products.

The weaker Canadian dollar, which now hovers around 76 cents U.S., was “supposed to be a godsend for exporters” but exports have actually fallen one per cent over the past year, noted Paul Ashworth, chief North America economist at Capital Economics.

He and other economists have argued that the loonie needs to fall further in order to boost exports so that the important sector can become a meaningful contributor to the economy.

But domestic demand, especially in the housing market, has driven the economy forward since the end of the recession.

The domestic side of the economy was again a big contributor to GDP during the quarter, with consumer spending up 2.2 per cent from the previous quarter in a sign that households feel more confident about making purchases.

In addition, Prime Minister Justin Trudeau’s stimulus program showed signs of taking off, with government consumption rising by one per cent over the previous quarter, though some of that is believed to be due to spending on combating the wildfires.

Business investment, which has been an economic sore spot for years, fell for the sixth quarter in a row. But, the bright side is that the 1.9 per cent decline was the mildest drop in the past year and a half.

Despite the disappointing second quarter, the hand off to the third quarter looked more optimistic. GDP in the month of June grew by 0.6 per cent as oil production in Alberta resumed following May’s fire-related shutdowns and evacuations. Manufacturing also picked up in June with 1.8 per cent growth.

That solid activity in June reinforced economists’ expectations that the economy is set to rebound in the third quarter.

“Looking beneath the headline drama, underlying growth continues to stumble along at little more than a one per cent annualized pace,” BMO’s Porter said.

“But we continue to expect that to improve in the coming year as the drop in energy investment ebbs.”