Canada's Economic Outlook

By Promit Mukherjee, Ismail Shakil

OTTAWA (Reuters) – Canada's economy is expected to fall short of the Bank of Canada's revised third-quarter forecast due to several temporary factors that hindered GDP growth in August, data released on Thursday indicated. This comes at a time when business output was already weak.

Economic growth for July was also adjusted downwards from 0.2% to 0.1%, according to Statistics Canada, with preliminary data suggesting a rebound to 0.3% in September.

Consequently, this equates to a 1.0% annualized growth for the third quarter, below the central bank's estimate of 1.5%, which had already been revised earlier this month.

Statscan's quarterly GDP figures depend on Canada's industrial output. The upcoming third-quarter report, due next month, will focus on income and expenditure calculations.

The stagnant GDP for August matched the median forecast by analysts from Reuters.

Canada's economic growth is hampered by high borrowing costs that have stifled business investments and consumer demand.

Goods-producing sectors contracted by 0.4% in August, the lowest level since December 2021, with the manufacturing sector declining by 1.2%, significantly contributing to August’s GDP.

The agency reported that durable goods manufacturing continued its downward trajectory, decreasing by 1.0% in August 2024, reaching its lowest since September 2021.

Temporary factors such as work stoppages at Canada's major rail companies and vehicle manufacturing maintenance contributed to the disappointing figures.

Andrew Grantham, a senior economist at CIBC, suggested that this data supports the case for another 50-basis point cut at the next Bank of Canada meeting to stimulate growth and reduce economic slack.

The central bank aims for economic strengthening and has reduced its key interest rate four consecutive times to 3.75% to encourage growth after inflation returned to the target range of 1%-3%.

Money markets heightened expectations for another 50-basis-point rate cut in December, increasing the probability from about 18% to over 25% following the GDP data release.

The Canadian dollar saw a slight increase, trading 0.06% higher at 1.3893 against the U.S. dollar, equivalent to 71.98 U.S. cents.

Bond yields for two-year Canadian government bonds dipped by 0.9 basis points to 3.169%.

The Bank of Canada will review another GDP report, along with inflation data for October and two job reports, before announcing its next monetary policy decision on December 11.