MNI: Canada Q2 GDP Gains 2.1% Led By Government And Investment

Canadian second-quarter gross domestic product rose 2.1% led by government spending and overall capital investment, a bit faster than the central bank's projection, while a flash estimate showed third-quarter GDP stumbling as output stalled for a second month in July.

Economic growth was slightly better than the first-quarter pace of 1.8% with growth from April to June lifted by a 6% gain in government spending and the 11% rise in non-residential structures, machinery and equipment. The second quarter pace was faster than the economist consensus of 1.7% and the Bank of Canada's forecast of 1.5%.

Statistics Canada's report Friday also suggested tight monetary policy is still slowing the economy as investors expect the Bank of Canada to cut interest rates for a third time next week following reductions in June and July. Household spending growth slowed to a 0.6% pace from 3.6% in the first quarter and residential construction fell for a third consecutive quarter with a 7.3% decline. 

The report shows no shift to dispel heavy economist and market sentiment for another rate cut next Wednesday, after Governor Tiff Macklem painted a picture of an economy that built up some slack as borrowing costs surged to the highest since 2001 and the projection for a rebound that co-exists with inflation coming back to target. The flash estimate for July of flat GDP backs up the view of some investors that growth coming in weaker than the Bank's third quarter estimate of 2.8% will pave the way for cuts at each of its three remaining meetings this year. 

With Canada's population growing even as the government says it will clamp down on record immigration, StatsCan said per capita GDP fell for the fifth time in a row, down 0.1% in the second quarter from the first three months of the year. Economists have said that's another measure showing the need for more rate cuts.

Growth led by government spending also indicates weakness in private demand. That includes exports shrinking at a 1.8% annualized pace following a 2% gain in the first quarter, with weakness in precious metals and autos.

There are signs of economic slack with unemployment rising by a percentage point over the last year as job creation lags record immigration, and inflation has slowed to a three-year low of 2.5%. Wage growth closely tracked by the Bank has also slowed but remains elevated.