By Palash R. Ghosh: Subscribe to Palash's RSS feed
August 31, 2010 3:14 PM EDT
The Canadian economy cooled down in the second quarter, as GDP printed at 2.0 percent on an annual basis, well below economists expectations of a 2.5 percent gain and and well below the Bank of Canada’s forecast of 3.0 percent, suggesting Canada is suffering from the slowdown in the U.S.
Moreover, growth in the first quarter was revised downwardly to 5.8 percent from 6.1 percent, said Statistics Canada.
The disappointing data comes on the heels of a spate of tepid Canadian economic figures, including weak retail and wholesale sales and softer CPI.
The aggregate numbers would appear to give the Bank of Canada more of an incentive to keep interest rates unchanged at its current 0.75 percent level at its next meeting on Sept. 8.
Statistics Canada noted that consumer expenditures on goods and services, as well as business investment on residential structures, grew at a slower rate than in the first quarter.
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Export and import volumes both rose, with growth in imports exceeding growth in exports for a second consecutive quarter.
“Slower economic growth was largely driven by the household sector,“ said, Diana Petramala, economist at TD Economics
“Real consumer spending came off of a year high, with growth of 2.6 percent in the quarter.”
Meanwhile, she added, residential investment (+1.3 percent) basically stalled in the quarter as a drop off in renovation activity offset a sharp 30 percent gain in new homebuilding.
In addition, slower spending growth, coupled with a sharp surge in personal income growth of 15.4 percent, resulted in the doubling of the personal savings rate to 6.0 percent, from just 3.0 percent in the prior quarter, Petramala indicated.
“After two quarters of robust economic growth, the Canadian economy has entered a new stage of what is expected to be slower economic growth,” she surmised.
“We expect economic growth to remain sub-three percent for the remainder of this year, and 2011. A clear slow-go recovery in the U.S. is sure to put a damper on Canadian economic growth in the second half of this year through its negative impact on exports and commodity prices.”
Canada will also likely have to contend with some domestic issues, she cited. namely the sharp acceleration in household indebtedness and a cooling in the Canadian existing home market are expected to constrain consumer spending growth to a 2.0-2.5 percent pace going forward.
She believes the Bank of Canada overnight rate will remain relatively low at 1.0 percent by year end, and 2.0 percent at the end of 2011.
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