Canada's economy likely shrank in 'abysmal' Q2

When Statistics Canada releases its GDP report this morning, the numbers are widely expected to confirm that the country's economy shrank in the three-month period ending in June.

But analysts say the negative second quarter — one economist predicts it will be "abysmal" — is likely a one-off that will be book-ended by positive growth quarters. The first quarter featured annualized growth of 2.4 per cent and a healthy rebound from the weak second quarter is expected in the third quarter.

So with only one quarter of negative growth, the Q2 GDP report isn't likely to herald a return to a national recession — generally defined as being two consecutive quarters of economic shrinkage.

Much of the damage in Q2 took place in just one month — May. Oil and gas production tumbled that month as a result of Alberta's wildfires and subsequent mass evacuations.

Real GDP in May plunged by a whopping 0.6 per cent from April — the largest monthly decline in seven years.

The wildfire effect

The Bank of Canada estimates that the wildfires slashed 1.1 percentage points from second quarter GDP. The central bank expects to see GDP fall by one per cent at annual rates in the second quarter — which is better than economists' consensus forecast of a 1.5-per-cent drop.

But the Q2 weakness won't be due entirely to the fires. "The quarter was already looking quite soft before the fires," TD senior economist Leslie Preston said in a report last Friday.

"Most of the components of growth are expected to disappoint: consumer spending is looking anemic, business investment likely had another contraction, and exports should subtract from growth," she said.

Earlier this month, Statistics Canada reported that Canada ran a record merchandise trade deficit of $3.6 billion in June, and May was almost as dismal.

"[The second quarter] is looking quite soft on the back of these numbers," Scotiabank Economics said in a commentary at the time.

June and beyond looks positive

For the month of June alone, today's GDP report is likely to show growth of 0.4 per cent from May. A recovery in oilsands production following the Alberta wildfires gets some of the credit for that.

The forecast growth in June would serve as a healthy hand-off to the third quarter, which the Bank of Canada expects to grow at an annualized rate of 3.5 per cent.

The central bank says the resumption of oil production in northern Alberta and the rebuilding of Fort McMurray will lead that growth.

The bank also says the first Canada Child Benefit payments will help growth in July and beyond. Those payments are expected to cause a boost in consumer spending, which is the biggest driver of GDP.

For the second half of the year, CIBC economist Nick Exarhos says "we'll be leaning heavily on Ottawa for growth," citing the arrival of those federal child benefit cheques. He also says the economy should start seeing the benefits of billions in promised infrastructure spending.

"Unfortunately, the rest of the economy continues to face headwinds, with export growth bogged down by high U.S. inventory levels," he wrote in a report last week.

We'll know the June and Q2 GDP numbers at 8:30 a.m. ET today.