Canada’s GDP Declines 1.6% in Q2 as US Tariffs Impact Exports, Marking First Drop in Seven Quarters
Canada’s economy experienced a notable contraction in the second quarter of the year, shrinking at an annualized rate of 1.6%. This decline, reported by Statistics Canada, marks the first decrease in the country’s GDP in seven quarters, primarily attributed to the impact of tariffs imposed by the United States. Additionally, the first-quarter growth estimate was revised down from 2.2% to 2.0%, highlighting the ongoing challenges faced by the world’s ninth-largest economy.
Decline in Exports
The downturn in Canada’s economy was significantly influenced by a sharp decline in exports, which fell by 7.5% during the April to June period. This drop followed a modest increase of 1.4% in the previous quarter. Notably, international shipments of passenger cars and light trucks plummeted by 24.7%, while exports of industrial machinery and equipment decreased by 18.5%. The travel services sector also saw a decline, with an 11.1% drop in international travel services. These figures underscore the adverse effects of U.S. trade policies on Canadian exports, raising concerns about the sustainability of economic growth in the face of external pressures.
Domestic Activity Provides Some Relief
Despite the negative impact of reduced exports, robust domestic activity helped to partially offset the economic downturn. Household consumption surged by 4.5% on an annualized basis, while residential investment increased by 6.3%. Government spending also rose by 5.1%, contributing to an overall domestic demand growth of 3.5%. This resilience in domestic spending suggests that while external factors have posed challenges, the Canadian economy retains some underlying strength. However, the monthly GDP data for June indicated a contraction of 0.1%, primarily driven by a slowdown in goods-producing industries, which account for approximately a quarter of the economy.
Interest Rate Speculations
The unexpected contraction in GDP has heightened expectations that the Bank of Canada may consider cutting interest rates during its upcoming meeting in September. The central bank has maintained its benchmark rate at 2.75% in its last three policy meetings. Following the GDP release, money markets adjusted their forecasts, now pricing in a 48% probability of a rate reduction on September 17, up from 40%. Economists are closely monitoring upcoming jobs and inflation data for August, as these indicators will play a crucial role in shaping the Bank of Canada’s decision-making process.
Future Economic Outlook
Looking ahead, an advance estimate for July suggests a potential month-on-month expansion of 0.1%, indicating that the economy may show minimal growth in the third quarter. However, early tracking points to a flat or slightly negative estimate for Q3 GDP. The Canadian dollar has weakened, trading at 1.3771 per U.S. dollar, while yields on two-year government bonds have decreased by 2.8 basis points to 2.664%. The mixed economic signals present a complex landscape for policymakers as they navigate the challenges posed by weak exports and the resilience of domestic spending.
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