- Second-quarter annualized GDP contracts by 1.6%, StatsCan said
- Analysts had forecast 0.6% second-quarter drop, growth of 0.1% in June
- GDP pulled down by big drop in exports, business investments
- Household and government spending hold up, helping the economy
OTTAWA, Aug 29 (Reuters) - Canada's economy contracted in the second quarter much more than anticipated on an annualized basis as U.S. tariffs squeezed exports, but higher household and government spending cushioned the impact, data showed on Friday.
The GDP for the quarter that ended June 30 decelerated by 1.6% from downwardly revised growth of 2.0% 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 increases the chances of a Bank of Canada rate cut in September. The BoC has kept rates steady at 2.75% at its last three meetings.
Money markets increased their September 17 rate cut bets to 48% after the GDP data was released from 40% before.
StatsCan said the economy contracted by 0.1% in June, mainly led by a decline in output from goods-producing industries that account for a quarter of the country's GDP.
"That weaker than expected trend in the monthly figures makes today's release supportive for our forecast of a September interest rate cut," Andrew Grantham, senior economist at CIBC Capital Markets, wrote in a note.
However, he added that jobs and inflation data for August would be critical for the rates decision.
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 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 would contract by 0.6% and the June monthly GDP would expand by 0.1%.
THIRD QUARTER LIKELY TO BE FLAT
An advance estimate for July showed the economy could grow by 0.1% on a month-on-month basis, meaning the third quarter would mark an improvement.
Still, economists said that slim growth in July would be worse than the BoC had predicted, which could bolster chances that it steps in to support growth.
"So while the July flash showed that the economy largely recovered the lost ground from June, our early tracking points to a flat-to-slightly-negative estimate for Q3 GDP," said Royce Mendes, managing director at Desjardins.
The BoC had said last month that after a substantial contraction in the second quarter, Canada's economy would likely grow by around 1% in the second half under the current tariff scenario.
The Canadian dollar traded down 0.17% to 1.3771 to the U.S. dollar, or 72.62 U.S. cents. Yields on the two-year government bonds dropped further after the data, by 2.8 basis points to 2.664%.
Exports 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 COVID-19 pandemic, with investments falling 0.6% in the second quarter.
Domestic demand, however, grew by 3.5%, indicating health in the domestic economy.
The boost came mainly from 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; Additional reporting by Nivedita Balu and Divya Rajagopal; Editing by Dale Smith and Barbara Lewis
Source: Reuters