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Canada’s economy grew 0.2 per cent on a monthly basis in July, Statistics Canada said on Friday, more than analysts had expected. However, quarterly growth is still tracking well below the Bank of Canada’s forecast, leaving the possibility of a jumbo-sized rate cut on the table.
While July’s gross domestic product (GDP) growth was more than the 0.1 per cent rate analysts had expected, advance estimates show GDP was unchanged in August, as increases in oil and gas extraction and the public sector offset decreases in manufacturing, transportation and warehousing.
“Canada’s economy bounced higher in July, but growth seemingly faded again in August,” Desjardins managing director and head of macro strategy Royce Mendes wrote in a research report on Friday.
“Growth appears to be tracking just over 1 per cent for Q3, well below the Bank of Canada’s 2.8 per cent forecast.” Desjardins expects the Bank of Canada to cut its benchmark rate by 50 basis points at its next announcement on Oct. 23.
Money markets see a roughly 50 per cent chance of a 50 basis-point cut at the bank’s next decision in October, according to Reuters, and are fully pricing in another 25 basis point cut in December.
Bank of Canada Governor Tiff Macklem noted in a speech on Tuesday that with continued progress on inflation it is reasonable to expect further cuts in the policy rate. Inflation in August hit the Bank’s two per cent target. Macklem also said the central bank wants to see economic growth strengthen further so that inflation stays close to the 2 per cent target, but that “some recent indicators suggest growth may not be as strong as we expected.”
“With headline CPI now already at the BoC’s 2 per cent target, oil sagging deeply, and the jobless rate at 6.6 per cent and rising, below-trend GDP growth is not a welcome development,” BMO chief economist Douglas Porter wrote in a research report on Friday.
“Governor Macklem has stated that the Bank wants growth to pick up, and the trend does not seem to be cooperating, clearly raising the odds of more aggressive hikes — i.e., 50 basis points in October.”
Still, some economists say Friday’s data is not enough to change their expectation for a 25 basis point in October, and that additional data releases coming before the October decision will be key in determining the size of the central bank’s next rate cut.
“Our forecast assumes that the BoC will do a couple of 50 basis point cuts, in December and January, after cutting by 25 basis points in October, but the timing of the 50 basis point cuts could get moved up if the September employment data looks weak enough,” CIBC economist Katherine Judge wrote in a research note.
“For the Bank of Canada’s October announcement, the upcoming employment report will be key in determining whether a 25 basis point or 50 basis point cut is necessary, with today’s data not enough to sway us from our 25 basis point call at this point.”
TD economist Marc Ercolao wrote in a report on Friday that “we don’t think today’s data tips the scales any more-or-less in favour of a potential 50 basis point (bps) interest rate cut.”
“Instead, more emphasis will be placed on upcoming labour market data as well as inflation data, where the Bank will be looking for signs that price growth can remain durably at 2 per cent,” Ercolao wrote.
Statistics Canada said the retail trade sector was the largest contributor to overall growth in July, recording the largest monthly growth rate (1 per cent) since January 2023. Increases in the public sector and the finance and insurance sector also drove growth. July’s growth came despite negative impacts from wildfires on transportation, warehousing and accommodation services, Statistics Canada noted.
Statistics Canada said service-producing industries grew by 0.2 per cent in July, while goods-producing ones expanded 0.1 per cent.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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