Canadian economy grew in 2nd quarter, mostly from government spending and higher wages

The Canadian economygrew 2.1 per cent at an annualized rate in the second quarter of 2024, though GDP per capita fell for the fifth consecutive quarter,Statistics Canada said on Friday.

The annualized growth rate was above the Bank of Canada's 1.5 per cent estimate from July and betterthan what economists were expecting.

Canadian households were stillspending,but at a slower rate, with necessities like rent, food and electricity leading the increase. The growth was offset as people bought fewer trucks, vansand utility vehicles,and spent less while abroad.

Employee compensation rose 1.6 per cent in the second quarter, with strong wage growth in the mining and oil and gas extraction industry.

There were also higher wages in health care and social assistance, educational services (partly due to retroactive payments for Ontario schoolteachers)and finance and insurance.

Canadian economic growth was "modestly better than expected" this quarter, but has weak momentum going into the next with flat monthly growth in June and the same forecast for July, wrote CIBC economist Andrew Grantham in a note.

That gives "ample reason for the [Bank of Canada]to continue cutting interest rates," he said.

The Bank of Canada is holding its September interest rate meeting on Wednesday. It's expected that the central bank will cut the key interest rate by another 25 basis points, bringing the rate down to 4.25 per cent.

'Underlying reality is less impressive'

Government spending led some of the quarterly growth, risingon higher wages for public employees and with an increase in hours worked across all levels of government.

Business investment and spending also increased. Spending on machinery increased in Q2, particularly for aircraft and other transportation-related equipment, the data agency said.

Housing investment was down 1.9 per cent, marking the biggest decline since the first quarter of 2023. There was lower investment in new construction and renovations fell.

Investments in non-residential structures grew, but were offset by declines in non-residential building construction.

"Despite the stronger GDP growth in the second quarter, the underlying reality is less impressive. The growth was largely driven by increased government spending and wage adjustments," wrote Andrew DiCapua, a senior economist with the Canadian Chamber of Commerce.

"While there is a positive note with business investment finally picking up ...the economy continues to show signs of underlying weakness," DiCapua wrote, saying he anticipates another rate cut at the Bank of Canada's meeting next week.

Real GDP by expenditure increased 0.5 per cent in the second quarter.