Canada’s Economy Contracts 1.1% In Second Quarter As Exports Weaken

Canada’s economic reopening appears to have stalled.

The country’s gross domestic product (GDP) fell at an annualized rate of 1.1% between April and June, Statistics Canada reported, down from a revised 5.5% gain in the year’s first quarter. Economists had forecast a 2.5% expansion in the second quarter.

Adding to the disappointment, economic growth fell a further 0.4% in July, according to a preliminary estimate.

It’s a worse-than-expected result that may prompt analysts to reconsider how quickly the nation’s economy will be able to fully recover from the pandemic, heightening worries about growth just as the country braces for a fourth wave of COVID-19.

Economists quickly began cutting their forecasts for 2021 growth, while the Canadian dollar fell, on the latest GDP data.

The disappointing GDP results could become an issue on the election campaign trail, potentially opening Prime Minister Justin Trudeau’s economic record to criticism. Canadians head to the polls on September 20.

The economic pullback in the second quarter reflects a sharp drop in exports, driven in large part by a microchip shortage in the automotive sector and other global supply chain disruptions.

Housing was also a drag as Canada’s real estate market cooled after a pandemic-driven boom. On the quarter, investment in residential structures fell by an annualized 12%, while exports plunged 15%.

The surprise weakness in July may also have been driven by supply chain snarls. Statistics Canada said the likely contraction during the month was led by manufacturing, as well as construction and retail trade.

The Canadian dollar pared gains after the GDP report and was down 0.1% to $1.262 per U.S. dollar as some traders questioned whether the slump in activity will slow the Bank of Canada’s efforts to pare back emergency levels of stimulus in the economy.