Source: The Canadian Press

Canada’s economy slowed more than expected in the second quarter as consumers tightened their pocketbooks, housing weakened and exports were squeezed by the weak American economy.

A Statistics Canada report Tuesday showed growth falling to 2% in the April-to-June quarter, well below earlier projections.

Such slower growth will likely have two effects — making it more difficult to create enough new jobs to cut the current 8% unemployment rate and likely keeping interest rates stable until there’s evidence of a stronger recovery.

Most of the jobs lost during the 2008-2009 recession have been recovered, but the economy needs to grow at a faster clip than 2% just to stand still because of annual growth in the labour force.

Jobs concerns and the state of future economic growth will influence the Bank of Canada, which is meeting next week to set interest rates. Central bank Governor Mark Carney may decide not to push rates higher again with such current sluggish growth prospects.

“With inflation, and now growth, both running below the central bank’s expected path, there’s reasonable doubt surrounding whether Carney will still proceed with a further rate hike in September,” said Avery Shenfeld, chief economist at CIBC World Markets.

In June, the Bank of Canada hiked interest rates for the first time in over a year following first quarter GDP growth that was the fastest pace in a decade.

But Tuesday’s growth in annualized real gross domestic product dropped to 2% after racing ahead at 5.8% in the first quarter.

That was below the Bank of Canada’s latest projection was for 3% growth in the second quarter, and economists had under economist projections of 2.5%.

A number of effects on the economy have cut growth — from the continued slowdown in the United States, which reduces demand for raw materials and finished goods shipped from Canada — to rising mortgage rates that have squeezed the housing market to government spending restraint to fight the deficit.

New harmonized sales taxes in Ontario and B.C. have also impacted consumer spending.

Shenfeld warned that the Bank of Canada should hold off on any interest rate increase after the second quarter GDP came in a full percentage point shy of the central bank’s last projection.

“We would advise standing pat to get further evidence on developments in the U.S., but has Carney changed his second-half projection sufficiently to come to that view? That’s less certain, but at this point, the odds tilt slightly against a September rate hike.”

Only in April, the Bank of Canada had projected the second quarter pull-back at 3.8% and that no quarter would fall below 3.5% for the rest of the year.

The central bank raised rates in June from the emergency low 0.25% it set during the recession and early recovery in order to stimulate consumer borrowing and spending. t raised rates for the second time in as many months in July to 0.75%. And many economist predict the central bank will do so again when it meets Sept. 8 before taking a pause until next year.

Despite Canada’s economic slowdown, Canada’s 2% growth clipped along at a faster pace than the 1.6% second-quarter rate of increase in the U.S. economy.

Douglas Porter, deputy chief economist at the Bank of Montreal (TSX:BMO) said the moderate advance left GDP levels just 0.1% shy of the pre-recession high set in the fourth quarter of 2007.

He predicts the Bank of Canada will raise interest rates one last time next week and then pause for a period as it waits to see how the global economy performs.

Overall, growth in the real gross domestic product slowed to 0.5% in the second quarter from 1.4 in the first. Real GDP was flat in April, and increased incrementally to 0.1% in May and 0.2% in June.

June’s numbers indicate there is momentum heading into the second half of the year, Porter said.

“The June gain gives a decent hand-off to (the third quarter), although we still expect growth to ease to less than 2% in the current quarter, as housing weakens further and capital spending tails off after the (second quarter) bounce,” he wrote.

No segment delivered a particularly surprising performance, Porter said, but the slowdown was driven largely by both consumers and governments reining in spending.

Consumer spending on goods and services advanced 0.7%, falling from a 1% gain in the first quarter.

Recent surveys show consumer confidence waning during the period ended June 30 as Canadians reined in spending in advance of further interest rate hikes and the introduction of the harmonized sales tax in B.C. and Ontario.

The price of goods and services rose 0.2%.

Canada’s housing market, which once paved the path to recovery, has slowed dramatically to grow by only 0.3% in the quarter, the slowest rate of increase since the first quarter of 2009.

Meanwhile, bullish business investment helped to offset some of the more cautious spending by Canadian households during the quarter, Shenfeld said.

Business investment in plant and equipment expanded 3.5%, the largest quarterly gain since 2005 — a sign that manufacturers are willing to spend.

Growth in imports outpaced growth in exports, while inventory levels rose for the second consecutive quarter.

The second-quarter increase in GDP was led by mining, notably oil-and-gas extraction. Manufacturing also contributed to the gain, along with the sector and public sectors (health, education, and public administration).