Canadian Economy Surprises to the Downside as Q2 GDP Shrinks 0.3%

Sometimes analysts and economists can really miss the market. The Canadian economy surprised to the downside in the second quarter with gross domestic product (GDP) falling 0.3%. On an annualized basis, GDP Bay Street analysts were predicting the Canadian economy would rise 2.5% while the Bank of Canada projected a second quarter GDP gain of two percent.

The unexpected drop in second quarter GDP also represents the first quarterly decline since the second quarter of 2020, which is exactly when the first wave of COVID-19 was cobbling the economy.

In July, the first month of the third quarter, Statistics Canada said that real GDP tumbled 0.4%, erasing roughly half of June’s gain. Optimistic analysts were expecting GDP to heat up in July with quarantine-weary Canadians taking advantage of the lifting of pandemic restrictions and spending their pandemic savings.

Clearly, this didn’t happen. Moreover, the July data does not bode well for the third quarter in general. If third quarter GDP also declines, Canada will officially be in a recession.

Could the Canadian Economy Slip into a Recession?

Is there a chance the Canadian economy will slip into a recession? For the most part, the Canadian economy is actually doing better than the numbers suggest. Commodity prices are up, corporate earnings are strong, the unemployment rate is declining, and the TSX is at record levels.

This means the dismal data has more to do with the highly contagious Delta variant and global supply chain constraints than weakness in the underlying economy. If people can’t purchase cars or electronics and have to wait six months to get a couch, they’re going to hold off making purchases.

And consumer spending accounts for approximately 53% of Canadian GDP. Keep in mind, rising inflation also continues to be a drag on household spending. As a result, it might take a while longer for Canadian GDP to fully recover from the coronavirus pandemic.

It’s certainly possible that third-quarter GDP could be negative, and that Canada is in a recession, but again, that has more to do with the pandemic and global supply chain disruptions than anything.

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Investors were shocked to see that Canadian GDP unexpectedly contracted in the second quarter. That weak momentum has carried into the third quarter as the third wave of COVID-19 forces consumers and businesses to keep their spending to a minimum.

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