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Canadian Economy Expands 3.7% Even as Domestic Demand Shrinks

By 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% in the three months through June, Statistics Canada said Friday in Ottawa, up from a paltry 0.5% increase in the first quarter. Economists had predicted a 3.0% increase. The quarter also ended better than expected, with a monthly expansion of 0.2% in June.

But the underlying details 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 actually contracted in the second quarter.

That could be a signal of growing unease among households and businesses about global economic conditions, potentially foreshadowing a sharper slowdown in the second half of the year. As a result, policy makers at the Bank of Canada may look through some of the strength in the report.

Markets are anticipating the Bank of Canada will join the global trend of monetary policy easing as early as October, as global trade tensions begins to hamper the nation’s economic outlook. The Canadian central bank’s next rate decision is Sept. 4, when it’s not expected to move.

The Canadian dollar rose on the GDP report, gaining 0.2% to C$1.3261 per U.S. dollar at 8:39 a.m. in Toronto.

Exports drive growth in Canadian GDP after two weak quarters

Businesses met some of the pickup in foreign demand by drawing down inventories, rather than ramping up production. The strong gain in exports, meanwhile, is seen as only temporary, reflecting a ramping up of shipments after a sluggish winter.

To be sure, the Canadian economic expansion in the second quarter was impressive — easily the fastest in the Group of Seven. Exports rose at an annualized 13% pace, contributing more than 4 percentage points to growth. A drop in imports also added to the expansion, as more of the nation’s demand was used to buy Canadian-produced goods and services.

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  • Energy products drove much of the increase in second quarter exports, as the Alberta government eased curtailments on oil production.
  • Household consumption grew by just 0.1% in the second quarter, for an annualized pace of just 0.5% — the slowest since 2012. That’s despite a strong 1.3% non-annualized gain in national income and a 1.7% increase in employee compensation. That means consumers were saving more of their income gains, raising the household savings rate to 1.7%.
  • Non-residential business investment contracted by an annualized 16% in the second quarter, reversing all its gains in the first quarter.
  • Housing investment recorded its first gain in six quarters.
  • The Toronto Raptors playoff run seems to have given a boost to June numbers, helping sales at clothing retailers, sporting goods stores and bars. The 0.2% June GDP gain was also driven by stronger construction and wholesale sales, offsetting a decline in manufacturing

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