Canada’s economy unexpectedly shrank 0.3% in the second quarter for an annualized contraction of 1.1% versus the consensus forecast of a 2.5% gain.  Declines in home resale activities and exports were the largest negatives.  Homeownership transfer fees shrank 17.7%.  Constraints in the auto sector led to a 4% decrease in exports.

Business inventories, government expenditure, capital investment in machinery and equipment, new home construction, and renovation were all higher on the quarter.

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As we anticipated, the loonie is lower and Canada Treasury prices are higher on the news.  Slowing activity in Canada’s ridiculously priced housing sector is much overdue; it is also disinflationary.  If the downturn in activity translates to falling prices–and it should–the effects will be full-out deflationary.  This will be a big negative for households and an economy precariously concentrated on highly levered home prices.