Canadian Quarterly GDP
(Q2 2024) 

Canada's GDP rises above expectations, but the devil is in the details

• The Canadian economy grew by 2.1% quarter/quarter annualized (q/q) in 2024 Q2, while 2024 Q1 was revised higher (+0.1% q/q from +1.7%). Stripping out external factors, final domestic demand came in at a very strong 2.4% q/q. The flash estimate for July showed effectively no growth.
• Government spending (+6.7% q/q) was a key driver of growth, as higher compensation of employees (an expense for governments) and purchases of goods and services came in well above expectations.
• Business spending on non-residential structures and machinery & equipment rose by a massive 11.1% q/q. Higher spending on aircraft equipment/parts and engineering structures in the oil and gas sector drove the gain. Residential investment on the other hand fell by a whopping 7.3% q/q, on lower construction and renovation activity. 
• Consumer spending slowed in the quarter (+0.6% q/q from 3.6% q/q in Q1). While Canadians still had to shell out for 'need to haves' like rent, food, and electricity, there was a notable decline in big ticket items like trucks and SUVs. 
• Net trade subtracted 0.4 percentage points from growth, as "lower exports of unwrought gold, silver, and platinum group metals as well as of passenger cars and light trucks and refined petroleum energy products were moderated by higher exports of crude oil and bitumen". We expect trade to bounce back significantly in Q3, as the ramp-up of Transmountain causes a leg-up in oil exports. 

Key Implications

• Canadian economic growth surprised higher in 2024 Q2. While the headline print was encouraging, the details were less so. Most of the growth surprise was driven by government spending and aircraft purchases, which should come back down to earth in the Q3 data. Made worse is that the engine of Canadian growth – the consumer – has slowed the pace of spending in the face of still high rates. Combine this with the fact that momentum stumbled in June and July, and the outlook for the remainder of the year has become less rosy.  
• The Bank of Canada is scheduled to meet next week and another cut seems like a forgone conclusion. Importantly, markets have solidified around a 25 basis point per meeting pace through the rest of this year, which would bring the policy rate to 3.75% by December 2024. While this will provide some relief to consumers and businesses, we don't expect a meaningful acceleration in economic growth until late 2025 – when rates finally start moving closer to our target of 2.5%.            

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