Surprise Contraction for Canada

While most major economies are recording strong growth as services and industries resume following the shutdowns from the pandemic, Canada became the only country in the Group of Seven to record a deceleration in second quarter growth.

Canada’s Q2 Gross Domestic Product shrank 1.1% on an annualized basis, even though both the Bank of Canada and consensus estimates called for an increase—analyst estimates were for 2.5% gain, and the central bank had predicted 2.0%. The drop was blamed on declines in housing, as the country’s once searing housing market that boomed during the pandemic, cooled from its March peak.

The country just came out of a third wave of coronavirus infections and lockdowns. And as Canada lifted its border restrictions for fully vaccinated Americans in early August, non-essential land or ferry crossings from Canada to the United States are still not allowed.

Preliminary growth projections for July are also pointing to a decline. Despite a loosening of COVID restrictions by most provinces, the country saw decreases in manufacturing, construction and retail trade. A surge in new infections due to the Delta variant, is further clouding the outlook. Including the July data, economic activity is 2% below pre-pandemic levels.

The impact of the slide on future monetary policy is unknown. While economists have stated that it could affect the timing of central bank policy tightening, that may change depending on inflation and activity during August. The Bank of Canada expects Q3 GDP to pick up at a greater pace.

The timing is particularly bad for Prime Minister Justin Trudeau, as it is just three weeks before the country’s national election. Most Canadians have indicated that the economy is one of their top reasons to vote.