Canada: Economy expected to grow by 3.7% in 17Q2 - TDS

The Canadian economy is expected to grow by 3.7% (q/q, annualized) in 17Q2, matching Q1, according to analysts at TDS.

Key Quotes

“Consumer spending (+3.9%) will again drive growth with particular strength in durable goods (+8.4%) spending as auto sales rose above 2.1 million units (annualized), record highs. Non-residential fixed investment (+6.3%) will also support growth, both from equipment and structures, notably helped by rebounding drilling activity in energy. Net trade should also contribute positively after largely flat performance over the previous two quarters. Exports are expected to surge (+10.6%) and outpace imports (+7.6%). The net trade pickup is a welcome development that came just as a key driver of growth, residential investment, fizzled out. After growing by 15.7% in Q1, residential investment (-2.5%) will decline alongside a sharp pullback in GTA existing home sales. Inventories should be a modest drag.”

“Looking at the month of June, industry-level GDP is forecast to rise by a 0.1%, due largely to the robust momentum in the services sector. Goods output is likely to underperform on a sharp pullback in manufacturing activity and the risks to energy output are tilted to the downside following an outsized gain in May. Services should benefit from resilient consumer spending, though it will be partially offset by the slowdown in existing home sales. While the 0.1% print will provide a more modest handoff to Q3, this should not come as a surprise nor should it concern officials at the Bank of Canada who had already presaged a slowdown in the July MPR. And with Q2 growth expected to come in higher than the Bank's projection (3.0%), this should keep the Bank on track for another rate hike in October.”

“Foreign Exchange

Market expectations are sitting at 3.7% on the quarterly annualized figure. This masks the lean towards a stronger print, with the tail of the forecasting community leaning to the right. For instance, if you remove the two outliers below 3.0% the average market forecast shifts to 3.67 from 3.53 while the median remains unchanged. We have also noted recently that much of the good news has been priced into CAD, with the NEER looking rich to the deceleration in data momentum. For the latter, data surprise indices are now running below the 3mma. We think this leaves CAD sensitive to some pullback even on a decent GDP print. Equally important, we think the overhang of long CAD positions and the lingering valuation gap between spot and our HFFV estimates (1.27) suggest the pair should push higher.”