Data released by Statistics Canada this morning shows the Canadian economy falling back into contractionary territory in July, with slowdowns hitting the manufacturing, construction, and retail sectors. The preliminary estimate – part of a special pandemic-related effort by the statistical agency – indicates a -0.4 percent drop in real gross domestic product, with continuing supply chain shortages (particularly semiconductors) and a normalisation in real estate sales levels likely helping to weaken growth.
The Canadian dollar dropped roughly 40 basis points on the release.
Last month’s preliminary estimate went unrevised, showing growth at 0.7 percent month-over-month, up 8 percent over the same period last year.
Growth contracted -0.3 percent in the second quarter: Increases in government spending and business investment weren’t sufficient to offset slumping exports or weaker real estate market activity. The economy ended June roughly 1.5 percent smaller than February 2020’s pre-pandemic level.
The Delta variant represents a risk: Confirmed Covid-19 infections jumped in August – accompanied by a higher number of hospitalizations and patients in intensive care units. With 73 percent of its population inoculated with at least one dose, Canada is well-positioned to fight the fourth wave – but isn’t immune. Echoing patterns seen in other countries, rising case counts could yet force government officials to re-impose restrictions.
Commodities will continue to play an important role in the loonie’s performance: The OPEC+ group will meet on Wednesday to reassess oil production levels. Under the last supply deal, the group was slated to raise output in 400,000 barrel-a-day monthly increments, but rising uncertainty over global demand may prompt a delay, lifting current crude prices.
But oil prices can’t rise forever: In an interview last Thursday, Robert Kaplan, President of the Federal Reserve Bank of Dallas said OPEC is likely to “maximize cash flow and not let prices get so high that it creates incentives for [US] shale to produce more”. In other words: oil prices might help support the current value of the Canadian dollar, but there is little room for upside.
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