Canada's economy contracted during 2nd quarter, StatsCan says

The Canadian economy appeared to stall in the second quarteras investment in housing continued to fall, led by a drop in new construction.

Statistics Canada said Fridaythe economycontracted at an annualized rate of 0.2 per cent in the second quarter.

The agency also revised its reading for growth in the first quarter to an annual pace of 2.6 per cent, down from 3.1 per cent.

The declinein the second quarter came as housing investment fell 2.1 per centto post its fifth consecutive quarterly decrease. New construction dropped 8.2 per cent in the quarter, while renovation spending also fell 4.3 per cent.

The drop in spending came as Canadians face higher borrowing costs fuelled by interest rate hikes by the Bank of Canada, which is trying to bring inflation back to its target of two per cent.

The weakness in the second quarter was also attributed to lower inventory accumulations, as well as slower growth in exports and household spending.

Exports of goods and services crept up 0.1 per cent in the second quarter compared with a 2.5 per cent increase in the first quarter.

Growth in real household spending slowed to 0.1 per cent in the second quarter compared with 1.2 per cent in the first quarter.

Good news that consumer spending has slowed: economist

Pedro Antunes, chief economist at the Conference Board of Canada, said it came as a surprise that the economy had stalled.

The Bank of Canada had expected a 1.5 per cent annualized GDP growth, while analysts had forecast a 1.2 per cent gain.

"We had been thinking the economy might be a little stronger than what it finally came in at. I think that's actually good news," he said, adding that it appears thecentral bank's tightened monetary policy is slowing consumer spending.

"Personally I think that we should hold off on any further rate hikes," Antunes said.

"The Bank of Canada is playing a difficult game here. It's not just about raising rates. It's about expectations and about kind of driving the message that [the bank]is going to be forceful on this issue.

Construction manager saysfewerhomes being built

The hardest hit sectors are retail and wholesale industries that cater to households and offices. According to Antunes, the slowdown in construction is somewhat concerning,but not surprising.

"We are trying to build more homes for, yes, essentially that very strong population growth that we're going through right now. [But] it's not unexpected given the fact that we've raised interest rates so drastically."

Colin Snaith, a senior manager with SGConstructors, said that construction projects are seeing the effects of higher interest rates.

"We've definitely seen a reduction in the numberof homes being built, particularly in the high-rise sector," Snaith told CBC News during an interview at a building site in Toronto.

"Our industry thankfully has remained quite busy, but that's due to the fact that a lot of the projects ongoing right now havebeen startedbefore the interest ratestook effect."

Snaith said there is a large backlog of construction projects that were scheduled to start soon but many of their start dateshave been pushed back, with the pre-construction period extended.

"I think everyone's just being more cautious with their dollar right now," he added.

"A lot of the time, financing is tied to condo sales and home sales are down right now. Everyone's just waiting for interest rates to stabilize.

Early estimates suggest real GDP unchanged in July

Meanwhile, business investment in non-residential structures gained 2.4 per cent in the second quarter, boosted by a 3.3 per cent gain in spending on engineering structures.

The overall pullback in the second quarter came as the economy contracted by 0.2 per cent in June.

Services-producing industries dropped 0.2 per cent in June, while goods-producing industries contracted 0.4 per cent.

Statistics Canada also said its early estimate for July suggested real GDP was essentially unchanged for the month, though it cautioned the figure would be updated.

The report comes ahead of the Bank of Canada's latest interest rate decision, set for next Wednesday.

The central bank raised its key interest rate target by a quarter of a percentage point to five per cent in July, saying it remained concerned that progress toward its two per cent inflation target could stall.