GDP: Consumers to the Rescue

Following positive GDP numbers in April and May, Statistics Canada reported today that a sharp drop in June dragged Canada’s economic growth to a mediocre pace of 0.4% for the second quarter.

June’s declines in manufacturing and resource extraction did further damage to industries that had declined in April and May. Construction also declined in June, pulling the whole goods-producing sector into negative territory for the quarter. Goods production was hobbled by a continuing trade deficit and a reduction in business investment.

The service sector also turned negative in June, but remained strongly positive for the quarter, more than offsetting the goods-producing sector’s decline. Service industries benefited from upticks in consumer and government spending. In particular, household final consumption expenditure surged by 0.9% in the second quarter, its largest quarterly jump since 2010.

However, it is not clear that such consumer spending can be sustained in subsequent quarters, given record household debt and rising mortgage rates. Similarly, existing austerity policies and the federal government’s commitment to eliminate its deficit by 2015 for electoral reasons cast doubt on whether public expenditure will continue to support economic growth.

In summary, Canada eked out mediocre economic growth in the second quarter mainly because of a surge in consumer spending that seems unlikely to continue.

UPDATE (August 31): Quoted in today’s National Post (FP2), Montreal Gazette (C2), Ottawa Citizen (F1), Windsor Star (A15), Saskatoon StarPhoenix (B1), Edmonton Journal (C3) and Vancouver Sun (C2).

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