Canada’s economy grew faster than expected in July but slowed in August, according to Statistics Canada. A customer shops at a grocery store in Toronto, May 30, 2024.Chris Young/The Canadian Press
Canada’s economy grew faster than expected in July, but appears to have lost speed in August, leaving economic activity below the Bank of Canada’s forecast and potentially bolstering the case for a larger interest-rate cut next month.
Statistics Canada reported on Friday that gross domestic product increased 0.2 per cent in July, slightly more than Bay Street analysts expected, as strength in retail sales and finance more than offset the drag caused by wildfires across the country.
At the same time, the preliminary estimate for August showed GDP was “essentially unchanged,” suggesting the economy lost momentum through the back half of the summer. Adjusting for rapid population growth, GDP per capita continued to decline in both months.
How Friday’s GDP data have shifted market bets and economist views for the next BoC rate move
While advance estimates are often revised, the August numbers suggest that the Canadian economy “remains in a growth funk,” Bank of Montreal chief economist Douglas Porter wrote in a note to clients.
“Canadian real GDP growth is tracking below 1.5 per cent in Q3, below potential and even below the modest pace of the past year. This means that even further slack is opening up in the economy, which will eventually put more downward pressure on inflation,” Mr. Porter wrote.
The GDP data are a key input for the Bank of Canada ahead of its next interest-rate decision on Oct. 23.
Since June, the central bank has cut rates by a quarter of a percentage point three consecutive times, bringing its benchmark interest rate to 4.25 per cent. In recent weeks, Bank of Canada Governor Tiff Macklem has hinted that he and his team could deliver a larger half-percentage-point cut if economic growth and inflation slow more than expected.
In July, the bank forecast GDP would increase at an annualized rate of 2.8 per cent in the third quarter. The latest Statscan data suggest third-quarter growth is running at closer to 1 per cent. The bank will publish a new forecast next month.
As the rate of inflation has fallen back to a more normal level – hitting the bank’s 2-per-cent target in August for the first time since 2021 – monetary policy makers have become more concerned about downside risks to economic growth and the rising rate of unemployment, which reached 6.6 per cent in August. Mr. Macklem said in a speech this week that economic activity needs to pick up to prevent inflation from falling below 2 per cent on the way down.
On Friday, financial markets raised their bets on a half-point cut from the Bank of Canada in October, although the debate is far from settled. Interest-rate swap markets see the choice between a quarter-point and half-point move as a coin flip, according to LSEG data.
The latest GDP numbers largely confirm a narrative that has held through much of the year: The overall size of the Canadian economy continues to grow slowly, helped by rapid population increases, but high interest rates are weighing on individual consumption and dampening business investment.
“No summertime blues for the Canadian economy, but the weather is getting cooler,” Andrew DiCapua, senior economist at the Canadian Chamber of Commerce, said in an e-mail about the GDP numbers. “While consumer spending is propping up the economy for now, slowing population growth will soon put a damper on things.”
In July, 13 out of 20 sectors tracked by Statscan expanded, across both the goods and services sectors. This was led by 1-per-cent growth in retail trade, driven in part by a rebound in consumer spending on cars. There was also notable strength in the financial sector as well as in public administration.
“Note that the broader public sector has seen real growth of 2.9 per cent in the past year, or roughly double the pace of the overall economy – not a great mix,” Mr. Porter wrote.
On the downside, construction activity remained notably weak, with non-residential construction contracting 1.7 per cent in July, the third decline in four months. Wildfires in Alberta and British Columbia that month weighed on rail transportation, warehousing and tourism, while blazes in Northern Quebec and Labrador temporarily shut down several iron ore mines.
Bay Street economists were divided about what the latest numbers mean for the Bank of Canada. There’s little doubt the central bank has been dovish in its recent communications, and the half-point cut from the U.S. Federal Reserve last week has bolstered the odds that the Bank of Canada will follow suit. But some analysts don’t think the economic picture in Canada has soured enough to warrant larger or faster rate cuts.
“This marks the fourth consecutive month of GDP growth and the sixth gain in the past seven months. Trend growth is mild, but you’d think the economy was collapsing with all the negativity out there especially the politically driven variety,” Derek Holt, head of capital markets economics at Bank of Nova Scotia, wrote in a note to clients.
“What we’re left with is a picture of an economy that is underperforming, but still growing in trend terms despite massive rate hikes in the pandemic and serial shocks being thrown at it,” he wrote.