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Canada's GDP Unexpectedly Goes Negative, Only Country in G7 to Do So

Canada's GDP unexpectedly went negative for the second quarter following huge monthly negative revisions with no explanation.
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Unexpected GDP Decline in Canada

Canada's GDP Shrank by 0.3% in 2nd Quarter

CBC News reports Canada's GDP Shrank by 0.3% in 2nd quarter, Ending 9-Month Streak of Expansion.

Statistics Canada reported Tuesday that the country's gross domestic product — the total value of all goods and services sold — declined in the second quarter. It's the first time since the initial recovery from COVID-19 began last summer that the economy shrank for an entire quarter.

The numbers also mean that at the end of June 2021, Canada's economy was still about 1.5 per cent smaller than it was in February 2020, before the pandemic started.

The slowing housing market was a big factor in the decline. High house prices bring with them all sorts of costs for things like real estate agents, lawyers' fees and other spending, so when the market cools, that spending cools with it.

The data agency said home ownership transfer costs, which include all costs associated with the transfer of a residential asset from one owner to another, fell by 17.7 per cent in the quarter. Nationally, home sales have fallen every month since March of 2021.

Dose of Reality

Economist Doug Porter with Bank of Montreal described the GDP numbers as "shockingly weaker than expected," noting that the preliminary estimate for July suggests the economy shrank during that month too.

"Remember all the commentary about how well the Canadian economy had dealt with the third wave restrictions during the spring? And how businesses and consumers had learned how to operate amid the virus? Well, the reality appears to have been much less constructive," Porter said.

Canadian Real GDP Details 

Real Canadian GDP fell 1.1% annualized instead of the 2.5% forecast gain as reported by TD Canada

  • Real GDP declined 1.1% (annualized) in the second quarter, well below consensus expectations for a 2.5% expansion. This left GDP around 2% below pre-pandemic (2019-Q4) levels. In nominal terms, GDP increased by 7.9% annualized in the second quarter. 
  • The weakness in the quarter was driven by a substantial drop in residential investment (-12.4%), and exports (-15%). The former was held down by significantly lower home resale activity as home ownership transfer costs fell 54.2% (annualized) in the quarter, while exports were hobbled by supply chain disruptions, particularly the semiconductor shortage which lowered motor vehicles and parts production. 
  • Business investment rebounded on the back of greater spending in the machinery and equipment category (+24.9%). Non-residential structures (+5.1%) and intellectual property products (+3.3%) also advanced in the second quarter. In terms of household consumption, spending was fairly flat (+0.2%). A rebound in outlays for services (+7.3%) was largely offset by a drop in goods expenditure (-7%). Notably, 32 out of 48 goods categories experienced declines in the second quarter. 
  • On the income side, household disposable income rose 9.2% in annualized terms in the second quarter, outpacing the gain in consumption. As a result, the savings rate increased to 14.2%, the fifth consecutive quarters it's been in double-digit territory.

Conservatives Hammer Trudeau

In response to the unexpected weakness, Canada's Conservatives Hammer Trudeau on Slowing Economy Ahead of Vote

Canada is the only Group of Seven country to record a deceleration in the second quarter, according to an OECD report.

"Canada's economy is getting worse, not better," Conservative leader Erin O'Toole said from his Ottawa headquarters. "Under Justin Trudeau we are heading further down the road of recession, not the road to recovery."

"It's a jaw-dropper," said Doug Porter, chief economist at BMO Capital Markets, adding: "It will probably be an uncomfortable question for the government today but I don't think the GDP number will have a huge impact on the elections."

Trudeau's Liberals are currently tied with the Conservatives at 33% ahead of the Sept 20 federal election, according a new Nanos Research poll. The left-leaning New Democrats have 19%.

Central Bank Forecast

The central bank last month said it expected Canada's economy to gain 2.0% in the second quarter, with growth picking up "strongly" in the third quarter as more services reopened.

GDP Bomb

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On the political side Scotiabank Economist Rips Canada Agency for Election GDP ‘Bomb’

A prominent bank economist hurled criticism at Canada’s statistics agency after it revised its economic figures for April and May with little explanation, giving Prime Minister Justin Trudeau’s political opponents an opening to criticize his record.

Statistics Canada said Tuesday that gross domestic product contracted at an annualized rate of 1.1% in the second quarter, missing expectations for a 2.5% expansion in a Bloomberg survey of economists. The data included substantial downward revisions for two months during which large parts of the country were under lockdown to contain Covid-19, but the release failed to include details as to the cause of the changes, which included output reduction in service sectors affected by the pandemic

How can a data agency revise GDP growth as much as Statistics Canada just did and say absolutely nothing about it?” Bank of Nova Scotia economist Derek Holt said in note to clients Tuesday.

There is a fundamental question of judgment at the agency in terms of dropping a sudden revisions bomb in the midst of an election campaign and offering no explanation other than we have more information on the past year-and-a-half.

Large Parts of the Country Under Lockdown 

I believe that sentence says what you need to know. But in case it's not clear, I can help: Lockdowns Reduce GDP.

Some people need pictures, not words. I can help with that too.

Closed Due to Covid-19 Canada

Why that was not reflected in the April and May data, is anyone's guess.

Regarding explanations, I invite Bank of Nova Scotia economist Derek Holt to try to get explanations for revisions from the BLS or BEA. 

Holt may also wish to try his hand at getting statements from the BLS or BEA on seasonal adjustments.  

I wish Holt success if he tries.

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