Posthaste: How worried should we be about Canada’s faltering economic recovery?


Good morning!

News of Canada’s GDP growth slipping has rightfully prompted many to sit up and take notice, especially as it comes in the midst of a federal election.

The 1.1 per cent annualized decline in second quarter GDP was a complete surprise given that the preliminary estimate from last month pointed to a 2.4 per cent annualized expansion.

Prospects for the third quarter don’t look promising either — while June GDP grew 0.7 per cent, preliminary data shows July slipped 0.4 per cent month-on-month.

“Even allowing for strong rebounds in August and September, that means third-quarter GDP growth could be close to 3 per cent annualized, rather than 6 per cent as we had pencilled in,” Stephen Brown, senior Canada economist at Capital Economics, said in a a report.

The disappointing drop in GDP prompted BMO Capital Markets to cut its full-year growth forecast by a full percentage point to 5 per cent.

In a note to clients, the bank’s chief economist Doug Porter argued, however, that there’s other significant data that presents a fuller picture of the true health of the Canadian economy.

Nominal GDP, for example, grew 7.9 per cent, and is now essentially back to its pre-pandemic trend.

“The bad news is the entire spending gain in the quarter was channeled into higher prices (i.e., inflation), and none into volume increases (i.e., real growth),” Porter said. “Still, rising nominal GDP carries positives, especially when partially driven by rising export prices, as it powers national income and government revenues.”

In addition, excessive savings by Canadian households now stand at $270 billion, or more than 10 per cent of current GDP, according to BMO estimates.

“We continue to believe that this wall of wealth will ultimately boost spending when restrictions recede,” Porter said.

Income levels remain high, initially due to government support, but now wages and salaries are rising as government transfers recede and companies face labour shortages. Employee compensation has now fully recovered recession losses and is now almost back to pre-pandemic levels.

Surging corporate profits are another indicator that under the hood, the engines of the economy are running smoothly.

Companies listed on the Toronto Stock Exchange enjoyed one of their best reporting seasons ever, according to Scotiabank’s estimates, with earnings per share in the second quarter reaching $327, an 111 per cent year-on-year increase.

“If earnings manage to grow at a 6 per cent-plus clip next year, that would exceed the 50-year CAGR of 5.7 per cent registered between 1969 and 2019 (pre-pandemic),” wrote Hugo Ste-Marie, director of investment strategist at Scotiabank, in a note to clients last week.

Canada’s current account surplus is also a good news story, while investment income has swung from being a big drag on Canada’s balance of payments into a solid surplus position, BMO’s Porter said.

Still, there is a lot of heavy lifting to be done, especially with the fourth wave of the pandemic raging in some provinces and global economic outlook less than rosy in major parts of the world. This morning, Goldman Sachs Group Inc. revised its forecast for U.S. economic growth this year, pointing to a “harder path” ahead for the American consumer than previously anticipated.

The Canadian economy is expected to tangle with politics this week, which will further muddy the waters.

The Bank of Canada will announce its interest rate decision on Sep.8, which will be followed by a debate in French among the leaders of the main political parties. BoC Governor Tiff Macklem is also giving a speech at the Fédération des chambres de commerce du Québec on Sep.9, followed by the only English-language debate the same night.