The Canadian economy unexpectedly dipped into contraction in the second quarter, at a 0.2 per cent annual rate instead of expanding at a 1.2 per cent pace as the consensus had expected. The momentum into the third quarter is equally dreary as June real gross domestic product came in at minus 0.2 per cent and the July “flash” estimate from Statistics Canada was as flat as a beavertail.

It could well be that the current quarter’s real GDP growth will come close to stagnating and remember that the Bank of Canada’s prediction was 1.5 per cent for both the second and third quarters in its most recent published forecast. Unless central bank governor Tiff Macklem and his policy group believe the supply side of the Canadian economy is contracting, the GDP data clearly shows that a disinflationary output gap is in the process of reappearing and with that, a likely shift back to the sidelines for the central bank.

With the Canadian economy, even with the immigration boom, clearly underperforming the United States, there is going to be added negative fallout for the Canadian dollar and its nickname of being the loonie will be well deserved.

The weakness in the Canadian economy in the second quarter was disturbingly broad-based. Consumer spending volumes softened to a mere one per cent annual rate from 2.4 per cent in the first quarter and this was the most subdued showing since the second quarter of 2021. As the “reopening trade” and fiscal savings both subside in tandem, service-sector spending, especially in the hospitality sector, is now in decline (soon to happen in the U.S). Frugality was front and centre, with the savings rate rebuilt to 5.1 per cent from 3.7 per cent in the first quarter.

Housing activity in aggregate contracted at an 8.2 per cent annualized pace, the fifth quarter of decline and the lowest level since the economy froze due to the pandemic in the second quarter of 2020. Total business outlays provided some comfort, expanding at a 10.3 per cent annual rate, with improvement across both non-residential construction and machinery and equipment capital expenditures. Net exports dragged down the headline GDP number by 0.5 per cent — not good news for the Canadian dollar, that is for sure.

For a Bank of Canada aching for signs of decelerating demand, it needs to look no further than real final domestic sales, which came in at a super-soft one per cent annual rate in the second quarter after an equally tepid 1.2 per cent in the first quarter, 0.2 per cent in the fourth quarter of last year and minus 0.9 per cent in the third quarter of 2022. The year-over-year trend in real final domestic demand, which was running at a red-hot 14.4 per cent pace two years ago, and then cooled to 4.1 per cent a year back, has turned to an ice-cold 0.4 per cent trajectory.

Tiff, what more do you need to see? Let me answer that: Only in the fourth quarter of 1995 (when fiscal policy was being tightened like it’s nobody’s business) have we ever seen the economy not either be in, head into or come out of recession with real final demand this weak — the central bank was hardly in tightening mode back then, I can assure you. A 90 per cent track record isn’t too bad, n’est-ce pas?

One last thing for the Bank of Canada to consider in its relentless inflation battle: For the first time since the second quarter of 2020, the year-over-year trend in the GDP price deflator has turned negative (-1.1 per cent). And what exactly is the case for more policy tightening when the annual trend in nominal GDP has wound all the way down to …. zero per cent. Yes, you read that right, a big, fat goose egg, even with immigrant-led two per cent population growth.

David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.