MNI 5 THINGS: Q2 Canada GDP Seen Up 3.0%, Above BOC's Forecast

By Yali N'Diaye

     OTTAWA (MNI) - Statistics Canada will release the second quarter GDP report

Thursday. Ahead of the release, we highlight five themes for particular

attention:

     --TOPPING BOC'S FORECAST

     Analysts in a MNI survey expect second quarter real GDP growth to

accelerate to an annualized rate of 3.0% from 1.3% in the first quarter,

exceeding the Bank of Canada's 2.8% projection. With estimates going all the way

to 3.5%, there is even a risk to the upside.

     The monthly June GDP, released at the same time, is expected to edge up by

just 0.1% following a 0.5% gain in May. The BOC expects the annualized growth

rate to go down to 1.5% in the third quarter. 

     --CONSUMPTION REBOUNDS

     Household final consumption growth is anticipated to rebound in the second

quarter after slowing to 0.3% in the first quarter, the slowest pace in three

years, for an annualized rate of 1.1% that quarter. 

     While retail sales volumes contracted 0.3% in June, a strong 2.2% gain in

May still allowed for a decent quarterly rate, as real sales expanded 0.9% in

the second quarter after falling 1.2% in the first quarter.

     --BUSINESS INVESTMENT SLOWS

     Business investment growth is a key pillar of the BOC's scenario as it is

the main channel to express uncertainty related to U.S. trade policy. The

category is likely to be a smaller positive contribution to growth in the second

quarter.

     In the first quarter, non-residential structures, machinery and equipment

rose 2.6% after expanding 1.9% the previous quarter. The contribution to the

first quarter's 1.346% annualized growth rate was 1.0 percentage point, after a

0.7-point contribution in the fourth quarter. Machinery and equipment alone rose

4.2% in the first quarter.

     The BOC's summer Business Outlook Survey pointed to "continued business

optimism" combined with rising capacity pressures despite the ongoing

NAFTA-related uncertainties, suggesting further investment increase.

     --NET EXPORTS BOOST

     The survey also showed that exporters expect their sales abroad to increase

at a faster rate over the next 12 months.

     "Firms generally anticipate strong growth in the U.S. economy, often tying

their expectations to U.S. corporate tax cuts and favorable US labor markets,"

the survey said. 

     Data received in the second quarter also back the scenario of stronger

exports.

     The latest monthly merchandise trade data showed that exports managed to

climb 4.1% in June, the largest gain since November 2016, despite U.S. tariffs

on imports of steel and aluminum from Canada since June 1. In fact, exports to

the U.S. rose 2.5% to a record C$37.1 billion in June. U.S. real GDP growth was

revised up to 4.2% in the second quarter on an annualized basis.

     In real terms, the goods trade deficit narrowed to C$2.9 billion in the

second quarter from C$5.4 billion, with exports up 3.8%, mainly on consumer

goods and energy.

     --HOUSING ADJUSTING

     On the downside, the housing sector could weigh on residential investment

as the sector continues to adjust to higher interest rates and tighter macro

prudential rules in effect since the beginning of this year.

     Residential investment fell 1.9% in the first quarter, the largest drop

since the first quarter 2009 as sales activity weakened. Residential investment

trimmed GDP by 0.6 points in the first quarter.

     While the bulk of existing home sales declines occurred in January

(-13.8%), sales continued to contract through April (-2.6%), and the recovery in

May (+0.6%) and June (+3.4%) was modest.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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