Canada’s Economic Growth Report

By Promit Mukherjee and Ismail Shakil

OTTAWA (Reuters) – Canada’s gross domestic product (GDP) expanded at a faster-than-expected 0.2% rate in July. However, an advance estimate indicated that growth likely stalled in August, bolstering hopes for a significant interest rate cut next month.

Economists welcomed the July growth, interpreting it primarily as a temporary increase between two stagnant months. They reiterated that GDP was expected to fall well below the Bank of Canada’s (BoC) third-quarter estimate. Royce Mendes, head of macro strategy at Desjardins Group, noted that growth appears to be tracking just over 1% for Q3, significantly below the BoC’s 2.8% forecast. Mendes anticipated a 50-basis-point rate cut on October 23.

Analysts had forecasted a 0.1% rise in GDP for July following no growth in June. The economy expanded in July despite wildfires negatively impacting several industries, driven primarily by services, particularly retail trade, public sectors, and finance and insurance.

The expected economic weakness in August is likely attributed to a contraction in manufacturing, transportation, and warehousing, which would counterbalance gains in oil and gas extraction and the public sector.

The BoC had initially forecasted 2.8% growth in Q3, but subsequent data has led economists to predict around half of that figure. Olivia Cross, a North America economist at Capital Economics, stated that the preliminary estimate of unchanged GDP in August suggests a short-lived momentum, putting Q3 growth on track to surprise marginally below their already bearish forecast of 1.2% annualized. Cross also expects a 50-basis-point rate cut next month.

The BoC has implemented three interest rate cuts since June, moving in quarter-percentage-point steps, but indicated potential larger cuts if the economy requires further support. Money markets currently see just over a 50% chance of a half-percentage-point reduction in borrowing costs during the central bank’s next announcement and are fully pricing in an additional 25-basis-point cut in December.

Following the data release, the Canadian dollar traded down 0.08% to 1.3475 to the U.S. dollar, approximately 74.21 U.S. cents, while yields on the two-year Canadian government bonds fell by 3.4 basis points to 3.07%.

On Tuesday, BoC Governor Tiff Macklem stated it was reasonable to expect more rate cuts given successes in cooling inflation and underscored the need for growth to absorb economic slack.

In July, economic growth was attributed to increased activity in both services (up 0.2%) and goods industries (up 0.1%), according to Statscan.