Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Growth in the second quarter came in slightly weaker than expected, as net exports were a drag on economic activity due to strong imports. Domestic demand remained robust with strength in consumer spending, especially on services, and robust business investment in machinery and equipment, non-residential structures and inventories. However, residential investment significantly dragged growth, as the housing market and renovation activity are cooling down due to higher interest rates.
Both employee compensation and disposable income improve in the second quarter. However, once adjusted for inflation, real disposable income was lower, suggesting a decline in purchasing power. Moreover, the saving rate decreased slightly with spending growing faster than income. With inflation remaining high and interest rates continuing to increase, households face continued pressure on their purchasing power and finances.
We expect economic activity to slow in the second half of 2022, as the sharp increases in interest rates continue to take their toll on economic activity, especially residential investment, and consumer spending. How strong consumer spending will be will depend on households’ willingness to spend the money saved during the pandemic, especially as inflation erodes households’ purchasing power and higher interest rates lead to higher debt-service payments.
Today’s GDP number does not change our view that the BoC will hike at next week’s meeting. However, with inflation remaining elevated and inflationary pressures continuing to broaden, we believe the BoC will increase its policy rate by 75bp.
The Canadian economy brew by 3.3% q-o-q annual rate (ar) in the second quarter of 2022 (+4.5% y-o-y). This followed a sharp increase of 3.1% q-o-q ar. in the first quarter of 2022. Two years after the start of the pandemic, economic activity stands 1.7% above its pre-pandemic level.
In terms of details, a large proportion of the rise in economic activity can be attributed to a robust increase in domestic demand and inventory accumulation (contributing 2.8 percentage points (pp) to growth), while net exports were a drag on growth (subtracting 5.2pp from growth). Inventory accumulation accounted for 5.9pp of the growth on the quarter. The strength in final domestic demand was mainly in business investment and consumer spending.
Household spending surged by 9.7% q-o-q ar, contributing pp to growth. This followed a robust 2.5% q-o-q ar. rise in the first quarter of 2022. Spending on services rose by 16.3% q-o-q ar., contributing 4.3pp to growth, led by a sharp increase in spending on travel, food and accommodation services. Spending on goods increased by 2.4% q-o-q ar., contributing 0.6pp to growth. Spending on semi-durable good, especially clothing and footwear, were the main driver, while spending on durable goods decline on the quarter.
Business investment declined by 9.2% q-o-q ar. on the quarter, reducing growth by 1.9pp. The details shows a big decline in residential investment, while investment in machinery and equipment and non-residential structures increased.
Residential investment dropped by 27.6% q-o-q ar., subtracting 3.0pp to growth. The reduction in activity was mainly the result of a decline in renovation activity and in ownership transfer costs, resulting from reduction in housing resale activity.
Business investment in non-residential structures increased 11.1% q-o-q ar., contributing 0.6pp to growth, as a result of an increase in engineering structures as spending at the Kitimat LNG project and other oil and gas projects continued in the second quarter.
Investment machinery and equipment edged higher by 19.3% q-o-q ar., contributing 0.5pp to growth. Investment in machinery and equipment remains below its pre-pandemic level.
The external sector was a big drag to the economy, subtracting 5.2pp to growth. Exports of goods and services increased 10.9% q-o-q ar. in Q2, contributing 3.5pp to growth, led by metal products and travel services. Imports jumped by 30.5% q-o-q ar., reducing growth by 8.7pp. The sharp increase in imports was primarily driven by travel services, passenger cars and trucks, intermidate metals, and machinery and equipment.
Canada’s terms-of-trade improved in Q2 (+5.0% q-o-q) mainly as a result of a continued increase in crude oil prices and other commodities, especially lumber and electricity. As a result, the terms-of-trade reached its highest level on record, boosting income growth on the quarter. This impact of the terms-of-trade on income will positively affect Alberta and other oil-producing provinces.
On the income side, household disposable income decreased by 1.0% q-o-q. The higher disposable income was due to a 2.0% q-o-q rise in employees’ compensation and a 4.2% q-o-q increase in property income, especially higher interest on deposits. On the other hand, government transfers declined (-6.6% q-o-q), as pandemic-related programs were phased out.
With consumer spending growing faster than disposable income, the household saving rate decreased to 6.2% from 9.5%, still well above its pre-pandemic level.
The monthly GDP for June rose by 0.1% m-o-m (+4.7% y-o-y). The detail shows that 14 of 20 industrial sectors posted gains in June. However, the preliminary estimate for July suggests that activity likely declined 0.1% m-o-m.
The level of economic activity is 2.3% above its pre-pandemic level. Only 11 out of 20 industrial sectors have economic activity above pre-pandemic levels, while others, like the arts, entertainment and recreation, and transportation and warehousing still about 10% and 8% below their pre-pandemic level, respectively.
The goods-producing sector rose 0.1% m-o-m (+3.5% y-o-y), mainly due to manufacturing, agriculture and mining, oil and gas. A decline in construction and utilities partly offset those increases. The service sector increased by 0.2% m-o-m (+5.1% y-o-y). Most of the higher activity was due to increased activity in client-facing industries and increased international travel. Hence, there were strong increase in food and accommodation services, transport and warehousing, and arts and entertainment. On the flip side, those increase were partly offset by decline in finance, insurance and real estate, sectors sensitive to increase in interest rates.
For Alberta, there is no specific data in the report. However, we can make an assessment based on activity in some key industries specific to Alberta. The activity level increased on the month in oil and gas extraction, support activity for crop production, oil pipeline transportation, and accommodation and food services. Moreover, Statistics Canada notes that the increase in arts and entertainment activity was linked to the participation of the Edmonton Oilers in the NHL’s Western Conference finala suggests most of the increase in the sector was likely concentrated in Alberta. On the flip side, extraction activity in non-conventional oil was down on the month This suggests for the province was likely in line with the national measure.
The continued improvement in the terms-of-trade in Q2, as oil prices continued increase, suggests continued support to income growth for both individuals and businesses in Alberta. This is in line with our observation that the value of the oil produced in Alberta remained elevated in Q2 at about $13bn on average.
Independent Opinion
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