Statistics Canada delivered an unexpected surprise to Bay Street economists Tuesday, by predicting a 0.4 per cent drop in economic output in July.

The federal statistics agency said gross domestic product (GDP) fell at an annualized rate of 1.1 per cent from April to June. Analysts had been expecting the economy would expand by 2.5 per cent.

The unexpected swing to contraction has lead to questions about the resilience of this country’s economy, as well as how it might impact the Bank of Canada’s (BOC) next move.

Here’s how economists are reacting to the latest GDP report:

Andrew Kelvin, chief Canada strategist, TD Securities

The fact that we are seeing a negative flash estimate for July, it makes the seven per cent Q3 growth rate the BOC was looking for essentially unattainable… I think we knew growth would peak this summer, but I don’t think anyone thought a) June would be the peak, or that b) deceleration would be so sharp.

David Rosenberg, chief economist and strategist, Rosenberg Research

The problem, and you’re seeing this in the United States, too, is that you’re seeing contraction in consumer spending on consumer durable goods, because we’re just completely maxed out after blowing our brains out on everything you can see, touch or feel in 2020 and the early part of this year.

The BOC is very bullish on the Canadian consumer. They seem to think there’s this pile of savings that’s going to go into the economy. The problem is that you’re really only going to renovate your house once. There was just so much spending on stuff and now we’re facing the pent down demand.

Douglas Porter, chief economist, BMO

Where do we go from here? We suspect that July's drop will reverse in August…We still look for a bump in activity as things erratically reopen in coming months/quarters, but this weak report will leave a mark. As a result fo the drop in Q2 and July, we have shaved our Q3 growth estimate to 3.5 per cent (from 6.0 per cent), which together cuts the full-year estimate for GDP to +5.0 per cent from 6.0 per cent

Stephen Brown, senior Canada economist, Capital Economics

The unexpected decline in second-quarter GDP all but removes the chance that the BOC will press on with its tapering plans at its meeting next week.

Royce Mendes, senior economist, CIBC Capital Markets

Overall, it seems that the Canadian economy wasn't on as strong a footing as we had believed, and with the fourth wave now seemingly here, the economy faces another storm to navigate through.

Nathan Janzen, senior economist, RBC Economics

While the GDP numbers are clearly softer than expected, not all the data was bad… Household spending on services was almost 10 per cent below pre-shock levels, so there is still substantial room for stronger spending on services to help drive stronger economic growth over the second half of the year, even with goods production bumping up against capacity constraints.  

Sri Thanabalasingam, senior economist, TD Economics

Looking further ahead, clouds are forming for the Canadian economy. Primarily, the Delta variant is spreading quickly in Canada… Provinces and businesses are already responding to the threat with a number of policies such as vaccine passports, mandatory vaccinations and regular testing. While this will likely help mitigate the impact of the fourth wave, business and consumer confidence could be negatively affected.