Bottom Line: Today’s blockbuster GDP report reinforces the need to raise the overnight rate target before the end of the year. In our view, BoC officials will come up to the conclusion that it is still preferable to stay on the sidelines on September 6th and hike at the October 25th meeting. Indeed, it seems appropriate to wait after the Federal Reserve’s September 20th meeting at which time the Fed will give more guidance about how it intends to shrink its balance sheet and after another possible debt ceiling drama in late September/early October. Moreover, BoC officials should be in no rush to announce a second 25bps hike since Canadian CPI inflation figures remain well below the 2% target.

1.
Canadian Real GDP Report – 2017Q2
Canadian real GDP advanced by 3.7% q/q saar in 2017Q1 and 4.5% in 2017Q2, the fastest pace of economic
growth registered since late 2011 (see chart on page 2). But this stellar growth episode is not the whole story. The
breakdown of real GDP’s major components includes several signs of a sustainable economic recovery.
Firstly, companies added new productive capacities: non-residential investment rose at a robust pace for a second
consecutive quarter (+7.1% q/q ann.) during 2017Q2. Businesses notably invested more in computer, communication
and furniture equipment. Also, the past improvement in commodity prices convinced companies to ramp up
investment in engineering structures (+13.2% q/q ann.).
Secondly, Canadian exports of goods resumed its recovery in 2017Q2 by expanding at its fastest pace in three years
(+11.8% q/q ann.), in line with U.S. real GDP growth. Exports of energy products, metals, industrial machinery, autos
and aerospace products were the main contributors to export growth. Altogether, in volume, the net export surplus
improved from the previous quarter but remains small.
Thirdly, household expenditures surged at a pace unseen post-financial crisis in 2017Q1 (+4.8% q/q saar) and Q2
(+4.6% q/q saar). Spending in durable goods, non-durable goods and services all rose briskly. This across-the-board
increase in consumer spending was supported by a boost in nominal disposable income (+6.8% q/q saar) rather than
by a drawdown in savings. The household savings rate edged up from 4.3% in 2017Q1 to 4.6% in 2017Q2.
The only major component of GDP which declined in 2017Q2 was residential investment (-4.7% q/q saar). This being
said, there is no broad-based fallout in housing activity (see chart on page 2): renovation spending rose at a healthy
pace for a third consecutive quarter (+4.3% q/q ann.) and new construction activity took a breather (0% q/q ann.)
after rising sharply in the previous two quarters. Instead, the 4.7% pullback in residential investment is specifically
tied to the cooling of resale market conditions in the GTA. National ownership transfer costs declined (-24% q/q saar)
due to the targeted housing policies announced in Ontario last spring. Since Toronto is the largest housing market in
the country, it is logical that this 24% contraction is deeper than the one observed in 2016Q3 (-18% q/q saar) which
was caused by the 15% foreign tax in Vancouver.
Finally, this strong growth momentum is not showing any signs of fading. Real GDP for the month of June rose by
0.3% m/m. Growth was broad-based, with goods (+0.5% m/m) outperforming services (+0.2% m/m) for a second
consecutive month.
Bottom Line: Today’s blockbuster GDP report reinforces the need to raise the overnight rate target before the end of
the year. In our view, BoC officials will come up to the conclusion that it is still preferable to stay on the sidelines on
September 6th and hike at the October 25th meeting. Indeed, it seems appropriate to wait after the Federal Reserve’s
September 20th meeting at which time the Fed will give more guidance about how it intends to shrink its balance
sheet and after another possible debt ceiling drama in late September/early October. Moreover, BoC officials should
be in no rush to announce a second 25bps hike since Canadian CPI inflation figures remain well below the 2% target.
Sébastien Lavoie | Chief Economist
514 350-2931 | lavoies@vmbl.ca

2. Economic Research and Strategy
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without in each case the prior express written consent of Laurentian Bank Securities.
1716151413
130
120
110
100
90
130
120
110
100
90
Components of Residential Investment (index 2013Q1=100)
Ownership transfer costs (resale market)
Renovations
New construction
Source: Statistics Canada /Haver Analytics
1716151413121110
6
4
2
0
-2
6
4
2
0
-2
Canadian Real GDP
(q/q % saar)
Canadian Real GDP
(year-over-year % change)
Source: Statistics Canada /Haver Analytics