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Canada’s economy grew 2.1 per cent on an annualized basis in the second quarter, Statistics Canada said on Wednesday, more than analysts and the Bank of Canada expected, though the central bank is still on track to cut interest rates next week.
Analysts had expected the economy to grow 1.6 per cent in the quarter, according to Reuters, while the Bank of Canada had forecast growth of 1.5 per cent. On a monthly basis, expectations were for real gross domestic product (GDP) to grow 0.1 per cent in June. It was unchanged at a rate of 0 per cent.
While the quarterly rate of growth was above expectations, CIBC economist Andrew Grantham noted that “weak momentum heading into the third quarter gives ample reason for the BoC to continue cutting interest rates.”
The Bank of Canada is widely expected to cut interest rates for the third consecutive time at its upcoming rate announcement on Sept. 4. Financial markets now see an 80 per cent change of a 25 basis point cut next week, up from 77 per cent before the GDP data was released.
Preliminary data suggested GDP was unchanged in July, as construction, mining, quarrying, and oil and gas extraction and wholesale trade sectors recorded decreases, and finance and insurance and retail trade showed increases.
“That leaves early tracking for Q3 at around 0.5 per cent annualized, allowing for modest growth in August and September, which would be well below the 2.8 per cent forecast from the Bank of Canada’s [Monetary Policy Report],” Grantham wrote in a research note.
“Because of that we still see the Bank of Canada reducing interest rates by 25 basis points at each remaining meeting this year.”
The growth in the second quarter was led by higher government expenditures, business investment and household spending on services, moderated by declines in exports, residential construction and household spending on goods, Statistics Canada said.
“The headline GDP beat for Q2 won’t change the fact that central bankers are on track to cut rates another 25 basis points next week with the economy still operating with slack,” Desjardins managing director and head of macro strategy Royce Mendes wrote in a research report, noting that the growth in the second quarter was mostly due to strength from “unsustainable sources” and that the beat “is less impressive than the headline might indicate.”
“Moreover, the surprising weakness to begin the second half of the year should see rising odds of a 50 basis point cut in October. While our base case still sees 25 basis point rate cuts being the norm, the risks surrounding that forecast are now clearly tilted towards something larger.”
With files from Reuters
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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