Canadian economy slows, sets stage for disappointing second quarter

Economic growth in Canada slowed in May, increasing the likelihood of that second quarter gross domestic product will disappoint.

May’s GDP grew a weaker-than-expected 0.1 per cent, following a 0.3 per cent expansion in April, according to Statistics Canada data released on Tuesday.

“Strapped down by high household debt and weak global demand, the Canadian economy has clearly transitioned into a period of slow economic growth,” said Diana Petramala, an economist at Toronto-Dominion Bank, in news release.

Assuming flat results in June, the economy is on track to grow between 1.6 and 1.8 per cent in the second quarter, according to economists at ScotiaBank. This would still put Canada ahead of the 1.5-per-cent second quarter growth in the United States.

The Bank of Canada forecast 1.8-per-cent growth in the second quarter in its Monetary Policy Report released earlier this month.

“The risk that this external weakness could deepen will likely keep the Bank of Canada holding monetary conditions highly accommodative through the end of this year,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.

Sluggish economic growth gives the central bank no reason to move from it’s current overnight rate of 1 per cent.

RBC had forecast 0.2-per-cent growth in May and Mr. Ferley said he expects some of the weakness over the month to reverse in June. Still, second-quarter growth will likely not be much changed from the 1.9-per-cent expansion in the first quarter, he said.

“The persistence of modest growth is likely in large part a reflection of a sluggish U.S. growth, declining activity in Europe and slowing growth in a number of emerging economies,” Mr. Ferley said.

Worries about weakening oil prices appear not to have severely impacted May’s figures. Extraction of oil and gas increased 1.5 per cent in May. This advance, combined with a 1 per cent increase in mining production, was enough to offset a 0.5 per cent decline in manufacturing over the month. 

As a result, the goods production component of GDP remained at the same level in May as the month before, Statistics Canada said.

But problems for the oil and gas sector may surface in coming months. Statistics Canada said drilling and rigging services decreased in May and support services for mining and oil and gas extraction dropped 8.7 per cent over the month.

Services industries expanded 0.1 per cent in May on strong volumes for retail sales (which recorded monthly growth of 0.7 per cent following a 0.9 per cent decline in April) and wholesale sales (up 0.4 per cent in volume terms in May).

“The slowdown experienced among Canada’s international peers, in particular the U.S. ... and other G7 economies which appear to be mired in recession, is likely to continue to weigh on the all important export sector,” Ms. Petramala said.

Canadian exports in May amounted to $38.9-billion, virtually the same level as April, but showed weakness in energy products, where exports fell 4.3 per cent compared with the month before on lower prices and volumes.

“This subdued pace of economic growth is likely to continue as we head into the second half of the year,” Ms. Petramala said.