09:16 AM EDT, 08/30/2024 (MT Newswires) -- According to Royce Mendes over at Desjardins, Canada's economy performed "admirably" in the second quarter, but that was mostly due to strength from unsustainable sources earlier in the period. Mendes noted real gross domestic product advanced 2.1%, beating both private sector economists' expectations and the Bank of Canada's forecast. But household spending growth remained relatively slow with Canadians continuing to save a significant share of their incomes. Outside of the pandemic, the savings rate of 7.2% in the second quarter was the highest since 1996. "The good news is that likely leaves a buffer for some Canadians who are set to face higher mortgage or rent payments," Mendes said.

Mendes noted strength during the period showed up in government spending, which rose as a result of higher compensation for employees. Business fixed investment also provided a significant tailwind, as spending on aircraft and other transportation equipment increased sharply. Still, he noted, higher government employee compensation isn't a sign of underlying strength in the economy and aircraft purchases tend to be lumpy, meaning that they can't be counted on to continue at that pace. As a result, the Q2 GDP beat is less impressive than the headline might indicate, Mendes added.

Most of the gains, Mendes noted, also showed up early in the quarter. Statistics Canada reported that June GDP was flat, with manufacturing providing a drag. The public sector continued to provide an offset, posting growth for a sixth consecutive month. But, Mendes said, "that's hardly a source for optimism". He noted the July flash estimate revealed that the economy likely stalled for a second month in a row. Desjardins very early tracking for the third quarter indicates that GDP growth is trending between 1.0% and 1.5% annualized, roughly half the pace that the Bank of Canada had forecast in its July MPR.

Mendes said the headline GDP beat for Q2 won't change the fact that central bankers are on track to cut rates another 25bps next week with the economy still operating with slack. Moreover, he added, the surprising weakness to begin the second half of the year should see rising odds of a 50bp cut in October. While the Desjardins base case still sees 25bp rate cuts being the norm, the risks surrounding that forecast are now clearly tilted towards something larger. He noted government of Canada yields were slightly higher following releases, but were outperforming US Treasuries on the day.