The August monthly GDP report shows that the Canadian economy basically stalled (down 0.01% month-over-month), continuing the trend of lackluster performance in the third quarter (July MoM growth was also about 0.03%).
The details of the August report are a bit more encouraging than the headline number suggests. The sectors one may worry about in a supply-shock-prone economy actually showed resilience.
- Retail trade still seems supported by consumer demand and rose 1.18% in the month.
- The usual victims of deteriorating trade relationships with the US also had a solid month—manufacturing saw 0.32% MoM growth while transportation and warehousing production increased 0.46% in the month.
- Construction, a proxy for local capital investment demand, was up 0.2% MoM.
- Finance and insurance also booked a 0.24% MoM increase.
Even though these are not exactly blockbuster numbers, they seem to suggest healthy local demand across goods and services consumption as well as capital investment.
So, why were the overall readings so unimpressive? There were several major weak spots in the monthly report that dragged down the economic growth.
- Wholesale trade, despite a strong month of retail performance, saw a 1.44% MoM contraction. This may be a reflection of businesses’ concerns about the tariff threats from the US government.
- Cuts in the government, as reflected in the 0.77% monthly decrease in value added from the public administration sector, are another substantial drag in August.
- Even the overall growth in manufacturing masked some sectoral weakness. Production in the automaking industry [1] contracted by 5.78% in August, the largest since January. (Luckily, the negative effect was offset by a strong month of petroleum refineries production—up 4.23% MoM—and machinery manufacturing—up 3.84% MoM.)
- Utilities are another source of weakness, down 0.42% in the month, as Canada reduced electric power generation, transmission and distribution activities.
More concerning is that the advance estimate for September GDP is -0.1%, as “[d]ecreases in manufacturing and mining, quarrying and oil and gas extraction were partially offset by increases in utilities and wholesale trade.” That means, assuming the advance figure is accurate, we will see a reversal of fortune in the major sectors.
Remember, September is the month in which Canada’s retaliatory tariffs were implemented. Tariffs, however righteous or politically popular they are, are at least partly a tax on local consumers; they increase the costs of imports, which can affect production costs, the cost of living and, more importantly, the economic sentiment. Put another way, winter is coming for the Canadian economy.
Ironically, one potential bright spot is that the US economy is still strong and Canada can still benefit from the spillover effect, especially as the Canada-US tariff war is still limited in damage.
- the precise name used by StatCan is “motor vehicles and parts manufacturing”
