A jump in exports helped the Canadian economy bounce back from a weather-restrained 1Q, with annualized growth of 3.1 per cent in 2Q after a downwardly revised 0.9 per cent in the first.
The Statistics Canada data on Friday showed gross domestic product growing at its fastest pace since 3Q 2011, beating the Bank of Canada’s July forecast of 2.5 per cent and exceeding market expectations of 2.7 per cent.
First-quarter growth was originally reported at 1.2 per cent.
Canada Export and Trade First Half 2014
Second-quarter growth was shy of the 4.2 per cent GDP expansion reported in the United States this week. For the first six months of 2014, Canada’s economy grew at a faster clip because, while both countries were hurt by bad weather, the US economy shrank in 1Q.
Bank of Canada Governor Stephen Poloz has been looking for exports to take over from consumer spending as a lead driver of growth, followed by business investment as companies regain confidence.
Key to exports is US demand, making the strong recovery there in 2Q all the more important.
Business investment rose by an annualized 3.4 per cent in Canada in 2Q, but that was mostly in residential structures rather than in plants, machinery, and equipment.
Canadian export growth is slated to rise to 4.7 per cent this year and 7.7 per cent in 2015, as global and particularly US demand builds, non-energy shipments rise, and the Canadian dollar weakens, according to the Royal Bank of Canada this week.
That predicted increase in exports comes after outbound shipment growth of just 2.2 per cent in 2013 compared with the previous, said Dawn Desjardins, assistant chief economist at the Royal Bank of Canada, according to JOC.com Thursday. Canadian import growth, however, is expected to take a bit longer to heat up, with inbound shipments slated to expand this year only 1 per cent from 2013, following a 1.1 per cent gain last year. Desjardins expects Canadian imports in 2015 to rise 5.1 per cent year-over-year.
Global trade volume growth has accelerated, but the pace has been “disappointing” this year. Trade has been expanding at a pace of roughly 2.75 per cent compared to a historical pace of about 4.75 per cent.
That’s a result of lower US economic growth in 1Q due to a harsh winter, along with slower economic activity in the Eurozone and China, Desjardins said during a Thursday webinar hosted by JOC.com. Geopolitical crises, ranging from sanctions on Russia for meddling in Ukraine to a sharp uptick in violence in Iraq, have also likely pulled down global trade volumes.
Even so, the US economy bounced back in 2Q and the growth is expected to continue, Desjardins said. The overall strengthening of the global economy is also aiding Canada.
Elsewhere, the Canadian dollar closed slightly higher Thursday as Canada’s current account deficit improved slightly in 2Q. The current account is the broadest indicator of trade in goods and services.
Canada’s current account deficit in 2Q narrowed slightly to $11.87 billion on stronger investment income, Statistics Canada said on Thursday.
The balance on international trade in goods posted a surplus of $1.66 billion, down from $1.78 billion in 1Q. Exporters have for long struggled with weak markets and a strong Canadian dollar but are showing signs of recovery.
The decline reflected a slight increase in the deficit on trade in goods and services, which was more than offset by a lower deficit in investment income.
The deficit on cross-border investment income flows shrank to $5.80 billion, from $6.27 billion in 1Q, as profits of Canadian direct investors on their operations abroad grew by $370 million.
Total exports rose by 3 per cent to hit a record $132.35 billion on higher shipments of motor vehicles and parts, grains, and forestry products. Exports of energy products – which accounted for 25.4 per cent of all exports in 2Q – fell by 3.5 per cent to $33.64 billion.
Total imports rose by 3.2 per cent to $130.72 billion on greater imports of motor vehicles and parts, consumer goods, and chemical plastic and rubber products.
RBC Economist Nathan Janzen told MNI.com that trade will contribute 2 percentage points to the 2.5 per cent 2Q GDP growth rate.
Canadian GDP did grow 1.2 per cent, largely because imports fell in the same period. Canada’s economy picked up speed in 2Q growing 2.5 per cent year-over-year in the April through June period. Part of that increase is the result of a rise in retail sales and manufacturing activity, boding well for what Desjardins expects will be sustained economic growth for the next 18 months. While manufacturing sales shrank 3.7 per cent year-over-year in 1Q, sales rebounded by 8.2 per cent on an annualized basis in the following quarter. Similarly, retail sales inched up 0.3 per cent year-over-year in 1Q only to jump 7 per cent in 2Q compared with the same period a year ago.
Foreign demand for Canadian exports has risen, a positive sign since the country has been dependent on domestic demand following the global recession, she said. Demand is broadening beyond energy exports to non-commodity products, such as aircraft and consumer goods, Desjardins said to JOC.
“The drop in inventory growth and increase in export growth are probably linked as weather-related transportation disruptions during the winter appeared to result in significant inventory stocking with those products being shipped to market as the weather improved,” Janzen said.
In it’s Monetary Policy Report released July 16, the Bank of Canada expected “that the lower Canadian dollar and the projected strengthening of the global economy will lead to a broadening of the composition of growth in Canada.”
At the time, BOC projected a 2.5 per cent annual GDP growth in 2Q, before decelerating slightly to a 2.3 per cent increase in 3Q.