Canada economy expands most since 2011 on spending spree
Staff Writer |
Canada's economy unexpectedly accelerated at a 4.5 percent pace in the second quarter, tops among Group of Seven countries, led by the biggest binge in household spending since before the 2008-2009 global recession.
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Annualized growth was the fastest in six years and topped the 3.7 percent average forecast from economists. The expansion surpassed the 3.7 percent first quarter growth rate, which was left unchanged Thursday by Statistics Canada.
The surge in growth should help cement the chances the Bank of Canada will continue raising interest rates this year, possibly as soon as next week , as the nation's economy nears full capacity in what is turning out to be the strongest growth spurt in more than a decade. The central bank forecast in July spare capacity would be eliminated by the end of this year, based on a second-quarter growth forecast of 3 percent.
Canada's dollar reversed declines after the report, rising 0.5 percent to C$1.2551 versus its U.S. counterpart at 10 a.m. Toronto time. The loonie traded at 79.67 U.S. cents, and was the top gainer among Group of 10 currencies. Two-year government bond yields jumped four basis points to to 1.28 percent.
Investors are fully pricing in at least one more rate increase by the end of this year, and at least one more in 2018. The odds of a hike as early as the Sept. 6 rate decision jumped to 41 percent, from 27 percent Wednesday, based on trading in the swaps market. Canadian Imperial Bank of Commerce adjusted its forecast and now calls for a rate hike next week.
The nation is benefiting from a confluence of developments that include a synchronized global recovery and rising trade volumes. The bottoming of the oil shock in western Canada is also helping, along with federal deficit spending, rising industrial production in developed economies and soaring home prices in Toronto and Vancouver.
The second-quarter gain marks a fourth straight quarter of above-potential growth, averaging 3.7 percent over that time. That's the fastest four-quarter average since 2006.
Today's GDP numbers also leave the Canadian economy flirting with 3 percent growth for all of 2017. If that happens, it would end a five-year stretch of sub-3 percent growth that's already tied as the longest on record in data going back to 1926. It would also be a full percentage point of growth faster than the U.S.
Canada's consumers, benefiting from a buoyant jobs market and rising home values, are responsible for the surge. Household consumption rose at an annualized 4.6 percent pace in the second quarter, following a 4.8 percent gain in the first quarter. That's the best two-quarter gain since before the 2008 recession.
Another positive in the numbers is that the pick-up in consumption was financed by gains in disposable income, not a lower savings rate. In fact, the household savings rate increased to 4.6 percent in the second quarter from 4.3 percent.
The national savings rate fell to 3.4 percent from 4 percent on reduced saving by corporations and borrowing from governments. ■