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Posted Thursday October 3, 2019


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GDP Canada

Goods sector decline offsets service sector gain in July

Economic output was unchanged in July. A small gain had been expected; A surprisingly large drop in goods sector output, particularly oil and gas related, offset an increase in the services sector; GDP is up 1.3% y-o-y, as steady services sector growth has more than offset weakness in the goods sector by David Watt

GDP was flat in July. The consensus expectation was for a gain of 0.1%. Goods sector output fell by 0.7% m-o-m. This was the second straight contraction in goods sector output, following a 0.2% drop in June. In July, three of the five goods producing categories declined led by mining, quarrying, and oil and gas.

On the services side of the economy, output rose by 0.3% m-o-m, led by wholesale trade. Overall, 11 of 15 service-producing categories posted increases in output in the month.

From a year ago, GDP is up 1.3%. This was down from the earlier 1.5%, and was also weaker than the expected reading of 1.4% . The services sector has been the mainstay of the economic expansion, rising by 2.5% y-o-y, having posted a steady growth rate over the last two years. The goods sector has been more volatile, with output currently down 1.8% y-o-y.

Implications

We expect Q3 GDP growth to slow to 1.2% from the 3.7% increase observed in Q2. Today's weaker than expected flat reading for July GDP is a small downside risk to our Q3 forecast. The results suggest that some of the sectors that helped provide some resilience to the Canadian economy in the first half of the year are starting to fade.

In particular, we see some evidence that the global slowdown in trade and manufacturing activity might be starting to hit the Canadian economy. The evidence of such a development was an important part of our argument in favour of a Bank of Canada 25 basis point rate cut in October. While the market is pricing only a small chance of a rate cut at the end of the month, today's data highlights that the risks to the economic outlook are to the downside and that a tweak to the policy rate to offset slowing domestic growth and heightened global tensions remains appropriate.

One development we are watching closely is the short-term momentum in non-commodity manufacturing. Earlier this year, the improving momentum in non-commodity manufacturing had helped to assuage concerns about a slowdown in the global manufacturing sector. That no longer seems to be the case.

The services sector, meanwhile, does still have some important positive momentum. [With respect to] the percentage point contributions of key services sector categories to short-term growth. The largest contributions are from education and health care, and real estate. The former is a fairly steady source of growth, while real estate has recently benefited from a decline in interest rates which has helped to bolster housing sector activity.

Even though the services sector seems poised to provide underlying positive momentum to the economy, there are also signs that some of the positive momentum from earlier this year is fading, notably in wholesale and retail trade. This is despite the solid gain in wholesale activity in July.

The upswing in short-term momentum in the services sector in prior months aligned with the strong rebound in domestic demand in Q2. The July data points toward some moderation in domestic demand in Q3, which along with the slowdown in the goods sector suggests that the resilience of the Canadian economy to global economic turbulence will be tested in the second half of 2019.

David Watt is Chief Economist, HSBC Canada











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