Canada Economic Recovery Comes To A Surprise Halt

Canada's economic recovery came to a surprise and screeching halt in the second quarter, casting a pall over snap elections called by Justin Trudeau to set a new post-pandemic course for the nation.

The economy, after nine months of strong growth that followed the lifting of initial Covid lockdowns last year, contracted by an annualized rate of 1.1 percent in the April to June period, according to government data released Tuesday.

Economists were expecting continued growth, but increases in business and government spending were insufficient to offset a decline in exports and a shock slowdown in housing resales, according to Statistics Canada.

"It seems that the Canadian economy wasn't on as strong a footing as we had believed, and with the fourth (Covid) wave now seemingly here, the economy faces another storm to navigate through," CIBC analyst Royce Mendes said in a research note.

"It's disappointing," commented Derek Holt, vice president of Scotiabank Economics. He told AFP: "It's definitely a setback" as many believed businesses and consumers had adapted to operating amid Covid, but the data clearly shows "we're not out of the woods yet."

Analysts had forecast growth of up to 2.5 percent from April to June, after growth in the previous quarters of 5.5 percent, 9.3 percent and 41.7 percent.

Those came as the economy roared back from a 38 percent plunge in gross domestic product in the early months of the pandemic, when most of the country was ordered locked down.

June figures were in line with expectations, but downward revisions to data for April and May "wrongfooted economists' predictions," Mendes explained.

Early indications suggest the third quarter "also didn't get off to as hot a start as anticipated... despite public health restrictions continuing to ease," he said.

The sudden and unexpected slump comes as Prime Minister Justin Trudeau appears to be losing ground in a general election that he was initially favored to win handily.

The economy had been humming along, most of the jobs lost at the onset of the pandemic had been recouped, and with nearly all public health restrictions lifted, a sense of normalcy was setting in.

Voters simply had to decide which party and policies they favored to complete the pandemic pullout.

But two weeks into the campaign, Trudeau's Liberals are now neck and neck with Erin O'Toole's Conservatives, according to the latest public opinion polls.

Ahead of the September 20 ballot, Covid infections are also rising once again.

"The economy will be at the heart of debates in the last weeks of the campaign," predicted Jean-Marc Leger, president of Leger polling firm, noting that Trudeau is suddenly facing "a lot of headwinds."

"It would have been better for the Liberals if this economic news did not come out now," University of Ottawa politics professor Genevieve Tellier told AFP.

According to Statistics Canada, exports fell four percent while imports were flat in the second quarter.

Since the third quarter of 2020, housing investment emerged as the "predominant contributor" to the economy, the government agency said.

Both new construction and renovations of homes continued at a brisk pace in the second quarter of this year. But home resale activity, which had been a key economic driver, plunged.

Household spending, meanwhile, was flat after edging up in the first quarter. Outlays for durable goods declined as higher prices constrained demand.

Business investment in machinery rebounded. But shortages of microchips curtailed sales of passenger cars and trucks, and hit auto assembly lines, resulting in a drop in exports of motor vehicles and parts.

BMO chief economist Douglas Porter said early indications are that July will also be weak, but that could turn around in August.

"We're still looking for a bump in activity as things erratically reopen in coming months/quarters, but this weak (Q2) report will leave a mark," he concluded.