Canada’s economy flatlined in July, showed little momentum moving forward

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Canada’s economy showed little momentum as it entered the second half of the year, with gross domestic product flatlining in July and appearing to rise only slightly in August.

The country’s real GDP was essentially unchanged in July compared to June, when it showed a slight contraction, Statistics Canada said in a report on Friday. A preliminary estimate showed GDP ticked up 0.1 per cent in August.

While a sluggish economy is bad news for businesses and workers, it could be good news for the Bank of Canada, which is trying to curtail economic activity to bring inflation back under control.

The July numbers were impacted by several temporary factors, including port strikes in British Columbia and a recovery in sectors hit by forest fires in June. Still, the overall picture showed the Canadian economy lumbering under the weight of higher interest rates.

Andrew Grantham, senior economist at Canadian Imperial Bank of Commerce, wrote in a note to clients that the transitory nature of some of these economic forces “means that weak GDP readings may not necessarily translate into lower inflationary pressures in the near-term.”

“However, with retail sales on a clear weakening track, there should be enough evidence that domestic demand is responding to higher interest rates to prevent a further interest rate hike from the Bank of Canada this year,” he added.

The biggest drag on GDP came from the manufacturing sector, which shrank 1.5 per cent in July as a result of lower inventory build-up, the largest monthly drop since April, 2021. Plastics, rubber and chemical manufacturers were hit particularly hard by the B.C. port strikes, Statscan said.

The strikes impacted other sectors, notably the shipping industry, which contracted 3.4 per cent in July amid the shutdown of more than 30 ports in B.C. “Significant declines in both imports from and exports to countries other than the United States impacted the sector, in particular a decrease in goods coming from China,” Statscan noted.

This was partly offset by a rebound in economic activity in industries that had been affected by wildfires in June. Mining and quarrying rose 4.2 per cent, while accommodation and food services rose 2.3 per cent, the largest monthly increase since January.

Overall GDP in service-producing industries inched up 0.1 per cent in July, while goods-producing industries contracted 0.3 per cent. Only nine out of 20 sectors tracked by Statscan experienced growth.

Markets reacted to the data by trimming their bets on another Bank of Canada interest-rate hike next month. Interest-rate swaps, which capture market expectations about monetary policy, are now pricing in a 27-per-cent chance the central bank will raise rates on Oct. 25, according to Refinitiv data.

Bank of Canada officials held the bank’s policy rate at 5 per cent on Sept. 6, but said they were prepared to raise rates again if economic growth and inflation data don’t move in the direction they want to see.

“The GDP growth backdrop in Canada continues to soften, in contrast to sticky inflation prints that are still running above the Bank of Canada’s 2 per cent target,” Royal Bank of Canada economist Claire Fan wrote in a note to clients.

“With interest rates already at very restrictive levels, further increases from the BoC and other central banks will remain very data dependent. Firmer-than-expected inflation readings in Canada have increased the odds of another BoC interest rate hike this year. But inflation lags the economic cycle and there are growing signs that the impact of earlier interest rate increases are working to cool the economy,” she added.