Canadian economy unexpectedly contracts in Q2 ahead of rate decision

OTTAWA (Reuters) – Canada’s economy unexpectedly contracted in the second quarter, declining at an annualized rate of 0.2%, while real GDP was most likely unchanged in July after a 0.2% fall in June, data showed on Friday.

The second-quarter reading was far lower than the Bank of Canada’s (BoC’s) forecast for a 1.5% annualized GDP growth as well as the 1.2% gain expected by analysts.

The quarterly slowdown was largely due to declines in housing investment, smaller inventory accumulation, as well as slower international exports and household spending, Statistics Canada said.

The month-over-month decline in June was in line with forecasts, with wholesale trade being largest drag, Statscan said. The agency also noted that Canadian wildfires adversely impacted multiple industries, including mining and quarrying and rail transportation.

Statscan downwardly revised May GDP growth to a 0.2% increase from an initial report of 0.3% growth. First-quarter annualized growth rate was also downwardly revised to 2.6% from 3.1%.

Friday’s GDP report is the last major piece of domestic data before the BoC makes its next policy decision next week.

The central bank hiked its benchmark overnight rate to a 22-year-high of 5.0% in July, the 10th increase since March of last year. Last year inflation hit a four-decade high of 8.1%, four times the central bank’s 2% target.

Since then the bank has said its future moves would depend on its reading of the data, which have been mixed. Inflation surged more than expected in July to 3.3%, but the economy unexpectedly shed jobs in July and the jobless rate ticked up to 5.5%.

The high interest rate environment has coincided with falling housing investment, which record its fifth consecutive quarterly decrease in the three months ended in June. Housing investment decline was led by a sharp drop in new construction as well as a fall in renovation activities, Statscan said.

Statscan’s advance estimate for July indicated real GDP was essentially unchanged, as increases in the public, finance and insurance, and professional, scientific and technical services sectors were offset by decreases in the manufacturing, transportation and warehousing, and construction sectors.

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