Statistics Canada says economy contracted in second quarter, estimates drop in July

Canada’s economy had its worst quarterly stretch since the start of the pandemic, contracting at an annualized rate of 1.1 per cent between April and June and possibly dropping further in July.

The decrease in real gross domestic product in the second quarter was the first quarterly contraction recorded since the sharp drop during the same stretch one year earlier during first-wave lockdowns.

And it was a sharp turnaround from the agency’s initial estimate last month that the economy expanded at an annual rate of 2.5 per cent for the April-to-June period, which Statistics Canada chalked up to additional data that wasn’t available last month.

Statistics Canada said driving the drop in the second quarter of this year were declines in home resale activity and exports. Increased business and government spending, as well as new home construction and renovations in the quarter weren’t enough to make up the shortfall.

Household spending also stayed flat in the quarter, even as restrictions rolled back in much of the country and consumers had more places to spend.

What appears to have happened, though, is that consumer spending in the quarter appeared to fuel price increases amid widespread supply-chain issues, rather than fuel growth.

The Bank of Canada has decided to let inflation run above its two-per-cent target until the economy recovers, but now faces a more complicated policy-making landscape, said BMO chief economist Douglas Porter.

He said tightening monetary policy — usually done to cool price pressures — would slow growth, but adding stimulus could simply fuel inflation.

Statistics Canada said the main decreases in July were in manufacturing, construction and retail trade, while accommodation and food services had strong monthly gains as public health restrictions eased.

Total economic activity in July was about two per cent below pre-pandemic levels recorded in February 2020.