Canada’s GDP growth soars to 2.9% in second quarter – exports hit 4-year record

The Canadian economy has been on a hot streak recently, but a closely-watched indicator of tough times suggests the country may be in for an economic slowdown within the next two years.
The indicator that's flashing red is called the "yield curve," and it has to do with the interest paid on government debt.
What is a yield curve?
Like other governments, Canada issues bonds (i.e. borrows money) on the open market. Typically, buyers of those bonds demand a higher interest rate for long-term debt than for short-term debt.
That just makes sense: If you're going to lend for longer, you're taking a larger risk, so you demand more reward. This trend of interest rates rising for longer-term debt is called the "yield curve."
But sometimes, investors demand higher interest rates on short-term debt than on long-term debt. Analysts call this an "inverted yield curve," and it's taken very seriously because it's very good at predicting recessions.
In simplest terms, when the yield curve inverts, it means investors believe the economy will be weaker in the long run than it will be in the short run. They see trouble ahead.
And since these people are the investor class who control a great deal of the flow of capital through the economy, when they believe tough times are ahead, it tends to become a self-fulfilling prophecy.
Canada's yield curve hasn't inverted yet, but the chart below, from Bank of Montreal, shows it's rapidly heading in that direction.
Note how, when the spread turns negative, there is often a recession shortly after (the gray areas on the chart). Today the spread is clearly headed towards negative territory.
How reliable is the yield curve in predicting hard times?
According to numbers crunched by Bloomberg, since 1961 Canada's yield curve has inverted 15 times, and 10 of those times were followed by at least one quarter of economic contraction. So in essence, it has a 66 per cent chance of correctly predicting a downturn.

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Danbones said:

Yer X was just sayin that..except she got the grammer more better.
...or like the world wide recession YOU trumphaters want to get rid of trump.

https://tradingeconomics.com/canada/government-debt-to-gdp
The real story.

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MHz said:

If the growth was due to seasonal employment then there should be a contraction of about the same amount in Nov.

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Hoid said:

American GDP has almost doubled since 2000.
So has Canada's.

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Twin_Moose said:

My Grandkids will be thanking Scheer for righting the ship

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Twin_Moose said:

Huh? what you talkin about Willis?

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Twin_Moose said:

Huh? what you talkin about Willis?

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Hoid said:

Because when the majority of people like you that means you aren't popular

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The Bank of Canada is widely expected to keep interest rates on hold in its monetary policy decision on Wednesday, with many expecting the central bank to sit on the sidelines a bit longer as trade negotiations between Canada and the U.S. continue.
The odds of an interest rate hike tomorrow are below 10 per cent, according to trading in investments known as overnight index swaps. But, those odds jump to more than 80 per cent for a rate hike next month.
While many economists think that last week's second quarter GDP miss may be enough for the central bank to stand pat for now — after hiking rates for the fourth time in a year in July — not all are convinced that they should wait.
Derek Holt, head of capital market economics at Scotiabank, said the Bank of Canada has plenty of reasons for a hike this time around.
"Our longstanding house call for a hike tomorrow is admittedly marked by modest conviction, but there, nevertheless, remains a very solid case for continuing to hike and the risk of surprise should be higher than markets are demonstrating," Holt said in a note on Tuesday.

Holt points out that second quarter growth of 2.9 per cent may have slightly been below market consensus of a 3.1 per cent rise, but it was still above the 2.8 per cent that the central bank was forecasting.
"There may not be as good a chance to hike in October or December if growth moderates and so, the case for waiting may be weaker than the case for acting now while continuing to emphasize future data dependency," Holt said.
Bank of Canada governor Stephen Poloz has reiterated time and again that the central bank is trying to base its interest rate decisions on economic data.

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Holt added that if the case for leaving interest rates unchanged rests on NAFTA uncertainty, then that's a weak reason in his view.
"NAFTA risks will remain well into 2019 even in a best case scenario as negotiations then move toward debate within legislative assemblies and the need to pass any agreement in all three countries," Holt said. "Monetary policy cannot be put on hold until NAFTA risks are resolved.
"Poloz has been clear that he will consider NAFTA risks only as they impact data and there isn't much if any evidence of this so far," he added.

Debt to keep bank 'patient'

But Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets, said the central bank is still focusing on issues such as how households with high debt are coping with rising rates, even though the data so far suggests that higher rates have been manageable.
"The slowing housing market and new mortgage rules have caused debt growth to decelerate, but it's going to take time to work off debt burdens and bring debt ratios down," Reitzes said.
"Barring a big burst of sustainable income growth, elevated debt burdens will keep the bank patient."
Mortgage borrowing fell to the lowest since 2014 in the first quarter of this year as the introduction of new lending rules and rising interest rates started to have an impact.
Meanwhile, Karl Schamotta, director of market strategy at Cambridge Global Payments said the resumption of trade negotiations between Canada and U.S. on the same day as the interest rate decision is enough to "introduce an element of downside risk when the central bank releases its statement."
The Bank of Canada is set to make its policy announcement at 10 a.m. on Wednesday.

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mentalfloss said:

Debt to GDP is what's important

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White_Unifier said:

Yup. She must have broken his heart. Poor guy.

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So much has been said about the importance of a trade deal with the U.S. for the Canadian economy, as officials from both sides of the border continue to try to hash out a new agreement.
But, even if a new NAFTA deal is reached, it will not prevent the Canadian economy from slowing down from the robust growth we've seen recently.
Royce Mendes, senior economist at CIBC Capital Markets, forecasts that gross domestic product (GDP) will fall to 1.8 per cent growth next year, and then slow down to only 1.3 per cent growth the year after that, in 2020.
That compares to an expected two per cent growth this year, according to the Bank of Canada. The economy grew a strong three per cent last year.
"Our research finds that even with a NAFTA deal in place, the long-desired rotation in growth towards exports and business investment will be sluggish and won't offset the coming slowdown in household spending and housing activity," Mendes said in a note on Thursday.
Rising interest interest rates will hold consumers back from spending and make housing affordability even more costly, he said.
"As we've stated before though, that doesn't mean higher interest rates will break consumers' backs . With the unemployment rate expected to hover around six per cent over the next couple of years, households, in general, should be able to service their debt loads," Mendes said. "It will, however, leave fewer dollars for discretionary purchases."
The Bank of Canada is widely expected to raise interest rates for a fifth time next month since it began its hiking cycle in July of last year.

Export surge a 'flash in the pan'

Added to that, Mendes said new headwinds such as the U.S. becoming much more aggressive in imposing tariffs on Canadian exports with the current NAFTA deal still in place is a red flag for capital investment in Canada.
"Without healthy business investment, we also can't expect exports to become an engine for economic growth," Mendes said. "Last quarter's export surge was nothing more than a flash in the pan, in part due to U.S. buyers front running their own country's tariffs."
Government data last week showed that the economy grew a solid 2.9 per cent in the second quarter this year thanks to exports, which surged to their biggest increase in four years.
Sal Guatieri, senior economist at BMO Capital Markets, is also expecting growth next year to slow to 1.8 per cent, adding that both consumer spending and housing activity will weigh on growth.
But, he is forecasting a higher number than Mendes for 2020 at 1.6 per cent.
"A NAFTA deal is assumed in our base case forecast. It could raise investment and support growth somewhat," Guatieri said.
RBC senior economist Nathan Janzen said the bank doesn't publish forecasts for 2020, but agrees that growth is shifting lower.
Economists at TD Bank, meanwhile, said they were in the process of updating their growth forecasts, but think growth will likely be a bit higher than what CIBC is suggesting.
"We do expect a more modest pace of consumer spending going forward, and while housing activity should remain a contributor to growth, this sector as well should see more modest growth relative to the past," said Brian DePratto, senior economist at TD Bank.
In terms of NAFTA though, Depratto pointed out that while a resolution should be positive for Canada, it's more important to remember that the outcome is less about "adding markedly to the economy, and more about preserving the gains that were already there."

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