BMO's Douglas Porter Sees Drop In Annualized Q2 GDP Next Week, But Suspects Flattening Out In Q3

03:01 PM EDT, 08/22/2025 (MT Newswires) -- The major economic indicator on the Canadian calendar next week will be quarterly GDP on Friday, Aug 29, noted BMO's Douglas Porter in his weekly 'Talking Points' note.

Porter said it's expected to show about a 1% annualized drop in Q2, as exports were "walloped" (-25% a.r.) by both a reversal from the Q1 tariff front-running, but also all the deep trade uncertainty/chaos in the wake of Liberation Day early in the quarter. BMO will also be closely watching the monthly figures; and specifically, the early estimate for July GDP, to see how Q3 is shaping up. BMO suspects the economy will flatten out in Q3, just averting a so-called technical recession.

BMO's Porter also awaits the quarterly balance of payments, which will be released a day earlier, Thursday. BMO expects a "significant widening" in the current account deficit to more than 2% of GDP (or above $70 billion annualized) from near balance in Q1 will hog the headlines. "But," Porter said, "keep an eye on the capital side of the BOP. Many have noted the sudden drop in portfolio flows in the first half, which has seen heavy net selling of Canadian equities and a drying up of inflows to fixed-income."

However, Porter also noted, the counterpoint has been a dramatic turnabout in foreign direct investment. Following 11 consecutive years of outflows, and sometimes large net outflows, FDI has turned the corner. In the past four quarters (to Q1) there was a net FDI inflow of $21 billion, compared with a $65 billion net outflow in the four quarters to 2024 Q1. Porter said: "This sudden turnabout reflects both a big pick-up in the amount of investment flowing into Canada from abroad (to its best level since pre-GFC days), but also a notable slowdown in Canadian companies investing outside of the country. This positive reversal has kept the Canadian dollar from weakening even further over the past year, even as the current account has swelled and portfolio investment flows have turned heavily outward."

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