Canada Economy Stalls in May After Strong Start to 2022, Affected by Oil & Gas Production

While the drop in GDP may come as a surprise, it’s unlikely to undermine the broader trend of a country that’s run up against its production capacity. The economy is on track for a strong second quarter and on pace to surpass growth recorded in the first quarter, according to Bloomberg calculations.

That would also leave the Canadian economy still well ahead of the US and large European economies that are struggling to eke out any growth. Canada’s expansion is expected to outpace growth in many advanced economies this year, in part because the country won’t be negatively impacted by the Ukraine crisis thanks to the nation’s commodities sector.

The slump in Canadian economic activity last month may reflect maintenance shutdowns at oil production facilities. That would have come after a strong jump in energy activity in April, when the mining, quarrying and oil and gas extraction sector jumped 3.3%, the largest monthly growth rate since 2020. Good-producing industries as a whole jumped 0.9% in April.

More concerning was a sluggish reading for services, which was up just 0.1% in April. Economists are anticipating that services would be leading the rebound going forward after most Covid-19 restrictions were lifted earlier this year, driving up spending on travel and hospitality. Statistics Canada didn’t provide a detailed breakdown of growth drivers for May.

The rising cost of borrowing has led to a cooling of the home resale market across the country. Real estate contracted 0.8% in April.

The strong demand this year coupled with four-decade high inflation has put the Bank of Canada on an aggressive interest rate hiking path, with policy makers raising their main policy rate by 1.25 percentage points since March. The central bank is expected to hike again by 75 basis points in two weeks. Central bank officials estimate the country was already at full capacity at the end of last year.