Canadian economic growth lags expectations in Q2; July estimate points to contraction

he Canadian economy grew at an annual rate of 3.3 per cent in the second quarter, bringing the quarterly reading below estimates and an early look at July suggests a contraction.

Statistics Canada released its latest reports on monthly and quarterly real gross domestic product on Wednesday morning, which showed the economy expanded for a fourth consecutive quarter, driven by increased businesses and household spending.

According to the federal agency, real GDP grew by 0.8 per cent in the second quarter, with the economy staying flat in May before seeing growth of 0.1 per cent in June.

An early reading for July points to a contraction of 0.1 per cent.

Growth in the second quarter is down from the agency’s preliminary estimate of 4.6 per cent annualized growth.

For comparison, the economy grew at an annual rate of 3.1 per cent in the first quarter of this year.

Related: Canadian economy loses jobs for 2nd straight month, unemployment remains at historic low

Wednesday’s report said businesses ramped up their investments in inventories, which served as the major contributor to growth. Businesses also increased their investments in engineering structures and machinery and equipment.

Meanwhile, household spending on semi-durable goods increased, with the rise driven by an increase in spending on clothing and footwear as more people headed back to the office.

At the same time, housing investment declined in the second quarter along with household spending on durable goods.

Wages were up two per cent in the second quarter, with Ontario and Alberta contributing the most to the national increase. Statistics Canada said the Atlantic provinces’ wage growth for the quarter were almost double the national rate.

Related: Canada’s inflation rate slows to 7.6% in July as gas prices fall

While disposable income rose for households, their savings rate declined from 9.5 per cent in the first quarter to 6.2 per cent, largely due to inflation. However, the savings rate remains well above pre-pandemic levels, which was 2.7 per cent at the end of 2019. While the report provides the aggregate savings rate, Statistics Canada noted that savings rates tend to be higher among those in higher income brackets.

“Although these estimates suggest ongoing resiliency in household net savings, inflationary pressures on consumption and trends in employee compensation will likely be key determinants of future outcomes,” the agency said in its report.

The Bank of Canada has called the Canadian economy “overheated” and has been combating high inflation with a series of interest rate hikes.

The central bank is hoping higher borrowing rates will slow down economic activity and bring inflation back to its target of two per cent.

With the annual inflation rate reaching 7.6 per cent in July, the Bank of Canada is expected to announce another supersized interest rate hike Sept. 7.