Canadian Economy Faces Headwinds as Q2 Shows Contraction and Housing Investments Drop

A construction worker works on a new house being built in a suburb located north of Toronto in Vaughan, Canada, June 29, 2015.
A construction worker works on a new house being built in a suburb located north of Toronto in Vaughan, Canada, June 29, 2015.

The Canadian economy seemed to lose steam in the second quarter, with a noticeable slump in housing investments leading the way. On Friday, Statistics Canada reported an annualized contraction rate of 0.2% for the country’s economy during the quarter.

This announcement came after the agency revised down its first-quarter growth figures to an annualized rate of 2.6%, a drop from the previously reported 3.1%.

This economic downturn was largely influenced by a 2.1% fall in housing investment, marking its fifth straight quarterly decline. The report showed an 8.2% decrease in new construction and a 4.3% reduction in spending on renovations during the same period.

This decline in expenditure has been attributed to rising borrowing costs for Canadians, brought on by the Bank of Canada’s recent interest rate hikes aimed at reining in inflation to their 2% target.

The second quarter’s lackluster performance was also due to smaller inventory gains and weaker export and household spending growth. Exports of goods and services saw only a 0.1% uptick in the second quarter, a steep drop from the 2.5% increase in the previous quarter. Similarly, the growth in real household spending decelerated to 0.1% in the second quarter, a significant decrease from 1.2% in the first quarter.

However, it wasn’t all bad news. Business investment in non-residential structures saw a 2.4% increase in the second quarter, buoyed by a 3.3% rise in spending on engineering structures.

Statistics Canada also revealed that the overall economy shrank by 0.2% in June alone. Both services-producing and goods-producing industries experienced contractions, falling by 0.2% and 0.4%, respectively.

The agency’s preliminary data for July suggests that the real GDP remained largely stagnant, although it cautioned that these figures will be updated.

The report comes just days ahead of the Bank of Canada’s upcoming interest rate decision, scheduled for next Wednesday. The central bank had previously raised its key interest rate target by a quarter of a percentage point to 5% in July, citing concerns that the drive toward its 2% inflation target could lose momentum.