Canada’s Economic Growth in July

By Promit Mukherjee and Ismail Shakil

OTTAWA (Reuters) – Canada's gross domestic product (GDP) expanded at a faster-than-expected rate of 0.2% in July. However, an advance estimate indicated that growth likely stalled in August, according to data released on Friday. This development has bolstered hopes for a significant interest rate cut next month.

Economists welcomed the July growth but viewed it primarily as a temporary increase, noting it was surrounded by two months of stagnation. They reiterated that GDP would fall significantly below the Bank of Canada's (BoC) third-quarter estimate.

Royce Mendes, head of macro strategy at Desjardins Group, noted, "Growth appears to be tracking just over 1% for Q3, well below the Bank of Canada's 2.8% forecast." He anticipates that the Canadian central bank will implement a 50-basis-point rate cut on October 23.

Analysts surveyed by Reuters had anticipated a 0.1% rise in GDP for July, following zero growth in June. The economy managed to grow in July despite wildfires negatively impacting several industries, with growth primarily driven by the services sector, including retail trade, public sectors, and finance and insurance, according to Statistics Canada.

The anticipated economic slowdown in August is likely due to contractions in manufacturing, transportation, and warehousing—factors that essentially offset the growth seen in oil and gas extraction and the public sector, Statscan reported.

The BoC had forecasted an economic expansion of 2.8% for the third quarter, but subsequent data has led economists to predict growth closer to half of that figure. Olivia Cross, a North America economist at Capital Economics, said, "The preliminary estimate of unchanged GDP in August suggests that the momentum was short-lived and puts third-quarter growth on track to surprise marginally on the downside of our already downbeat forecast of 1.2% annualized." She also expects a 50-basis-point rate cut next month.

Since June, the BoC has reduced interest rates three times, moving in quarter-percentage-point steps, yet has indicated a willingness to shift to larger cuts if necessary to stimulate the economy.

Money markets currently predict a little over a 50% chance of a half-percentage-point reduction in borrowing costs at the central bank's next announcement, with a full expectation for an additional 25-basis-point cut in December.

Following the data release, the Canadian dollar was trading down 0.08% at 1.3475 to the U.S. dollar (or 74.21 U.S. cents). Yields on two-year Canadian government bonds decreased by 3.4 basis points to 3.07%.

On Tuesday, BoC Governor Tiff Macklem stated that it is reasonable to expect more rate cuts given the progress made in cooling inflation and emphasized that the central bank seeks to see growth increase to absorb economic slack.

The economic growth in July was attributed to rises in both services (0.2%) and goods industries (0.1%), according to Statscan.