OTTAWA (Reuters) -Canada’s economy contracted in the second quarter by a much larger degree than anticipated on an annualized basis as U.S. tariffs squeezed exports, but higher household and government spending cushioned some of the impact, data showed on Friday.
The GDP for the quarter that ended June 30 decelerated by 1.6% on an annualized basis from a downwardly revised growth of 2.0% posted in the first quarter, Statistics Canada said, taking the total annualized growth in the first six months of the year to 0.4%.
This was the first quarterly contraction in seven quarters.
A larger-than-expected deceleration in growth could boost chances of rate cut by the Bank of Canada in September. The BoC has kept rates steady at 2.75% at its last three meetings.
Money markets were predicting chances of a rate cut on Sept. 17 at close to 40% before the GDP figures were released.
StatsCan said the economy contracted by 0.1% in June, mainly led by a decline in output from goods-producing industries, which accounts for a quarter of the country’s GDP.
The quarterly GDP is calculated based on income and expenditure while the monthly GDP is derived from industrial output.
This is the third month in a row that the GDP, based on industry output declined and was the first time in three years that the economy contracted for three consecutive months.
Analysts polled by Reuters had forecast second quarter GDP to contract by 0.6% and the June monthly GDP to expand by 0.1%.
An advance estimate for July showed the economy could likely grow by 0.1% on a month-on-month basis, signaling that the third quarter might not be as bad as the previous one.
Exports, mainly responsible for sinking the economy in Q2, declined 7.5% in the second quarter, the statistics agency said, adding this was the biggest drop in five years.
Business investment in machinery and equipment also contracted for the first time since the pandemic, with investments falling 0.6% in Q2.
However, some silver lining in the second quarter came from a 3.5% growth in the final domestic demand, an indicator of the health of the domestic economy.
This was mainly boosted by household final consumption expenditure which jumped by 4.5% on an annualized basis, residential investments which rose 6.3% and government final consumption expenditure which surged by 5.1%, Statscan noted.
(Reporting by Promit Mukherjee; Editing by Dale Smith)
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