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The Macdonald-Laurier Institute’s leading indicator clearly points to the unsustainability of the upturn of growth. After a peak rate of increase of 0.8 per cent, the index has slowed to 0.2 per cent or less in the last three months. Most of the slowdown originated in the housing and manufacturing sectors, which had led growth in the first half of the year. Housing already is reeling from measures taken to cool the market. Meanwhile the auto industry implemented long-planned shutdowns starting in July.

Growth was buttressed by inventory building in the auto industry

It is worth reflecting on why the Bank of Canada began to raise interest rates for the first time in seven years. Publicly, Governor Stephen Poloz said that rates were hiked because lower rates had “done their job.” However, recall that the bank for years had said that low interest rates were intended to encourage an upturn in exports and business investment that would lay the groundwork for more sustainable growth. While the surprise cut in interest rates early in 2015 had the desired effect of lowering the exchange rate, the expected rebound in exports and business investment remains elusive.

Manufacturing exports continued to struggle in the first half of 2017. Virtually all of the increase in exports originated in energy and autos, the latter driven by inventory-building in the U.S. before production is cut. Exports of non-auto manufacturing goods continued to weaken. Declines were posted for all other exports except industrial materials. Bank of Canada Deputy Governor Carolyn Wilkins offered no explanation of this weakness, saying in mid-June that “We have been working hard to understand the forces behind the data” on exports.