OTTAWA — The confident consumer helped drive across-the-board economic growth in the second quarter, giving the country its best start to a calendar year since 2002.
Growth expanded at an annual pace of 4.5 per cent, which followed an impressive jolt of 3.7 per cent growth in the previous quarter.
The surprisingly strong results raise the question — how long can Canada keep this up?
Canadians, encouraged by cheap credit, a still-strong job market and better wages, have been a big part of the momentum because they’ve continued to open their wallets, Statistics Canada said Thursday.
Household spending stood out once again in the agency’s report, growing by 4.6 per cent, on a year-over-year basis, between April and June. This followed an even healthier 4.8 per cent reading in the first three months of the year.
Analysts like National Bank senior economist Krishen Rangasamy have doubts the pace can be maintained much longer.
“We’re not an emerging market,” he said, referring to Canada’s four per cent growth rate over the first half of 2017.
“Advanced economies can see those occasionally, but you cannot expect that type of growth for an advanced economy to be sustained.”
The sturdy growth provided the latest evidence that economic momentum has continued to build in 2017. The data arrived with the Bank of Canada widely expected to once again hike its benchmark interest rate in the coming weeks.
It solidified these rate-hike predictions and prompted some to suggest the increase could come as soon as next week’s scheduled announcement.
Rangasamy said the central bank’s intention raise its benchmark rate is a key reason why the growth will moderate in the second half of the year.
The higher rates, which would help prevent households from amassing too much debt, would start to unwind an era of particularly cheap credit for consumers, he said.
The country’s job-creation pace in the first half of the year is also bound to slow down, he said, particularly since the 186,000 new positions added over that period marked the best performance since 2010.
“It’s unlikely that this can be sustained,” said Rangasamy, whose bank is predicting growth to moderate to 1.8 per cent in the third quarter and two per cent in the final three months of 2017.
Looking back, however, the economy has enjoyed quite the ride in 2017.
The last time quarterly growth, which is measured by real gross domestic product, climbed as high as 4.5 per cent was six years ago when it hit 5.7 per cent.
“Canadian GDP is gangbusters,” said Manulife senior economist Frances Donald, who called consumer spending Canada’s “pillar of growth.”
She said spending is unlikely to slow down because the numbers show Canadians actually saved more during the quarter as well.
“There’s still fuel in the consumer’s tank,” said Donald, who credited robust economic fundamentals like job and wage growth for spending’s resilience.
Exports, particularly in the form of energy products, also gave a lift to real GDP in the second quarter. On the energy front, however, analysts said some of the improvement was due to last year’s comparably weak numbers, pulled down after oil facilities shut because of Alberta wildfires.
Taken together, exports expanded in the second quarter at an annualized rate of 9.6 per cent, said Jimmy Jean, senior economist with Desjardins.
The quarterly GDP increase came even though housing investments contracted at an annualized rate of 4.7 per cent during a period that saw the introduction of a new Ontario tax on foreign buyers in April.
A consensus of economists had predicted Canada would deliver a second-straight growth reading of 3.7 per cent, according to Thomson Reuters. The Bank of Canada had predicted second-quarter real GDP to expand by three per cent in its latest forecast, released in July.
Citing the strengthening economy, the central bank raised its rate in July for the first time in seven years — to 0.75 per cent from 0.5 per cent.
Many economists had been predicting the bank to only raise its rate again in October.
However, the GDP report was enough for CIBC chief economist Avery Shenfeld to change his mind. He thinks a rate hike is now more likely to land at next week’s meeting than in October.
“The bank can clearly argue that the economy simply doesn’t need rates as low as they have been to generate decent economic growth,” Shenfeld wrote in a research note.
For their part, Donald and Jean expect Bank of Canada governor Stephen Poloz to wait until October, once he’s had time to telegraph the second rate increase.
“Of course, nothing is entirely to be ruled out, especially with governor Poloz,” said Jean, who recalled the bank’s two 2015 rate cuts.
“He has surprised us in the past.”
The second-quarter acceleration was fuelled by an eighth-consecutive monthly GDP increase in June that included the construction sector’s largest gain in four years. The report said 14 of 20 industrial sectors saw growth in June as GDP expanded by a stronger-than-expected 0.3 per cent.
The strong June number also suggests the third quarter could be off to a good start.
Before the report, Desjardins was projecting 2.9 per cent growth for 2017. Jean now expects that prediction to head north of three per cent.