Canada Economic Growth Misses Forecasts, Backing Rate Pause

The Canadian economy rebounded slightly last month but still saw little growth, backing a case for the central bank to keep rates on hold despite inflation remaining elevated.

(Bloomberg) — The Canadian economy rebounded slightly last month but still saw little growth, backing a case for the central bank to keep rates on hold despite inflation remaining elevated. 

Preliminary data suggest gross domestic product edged up 0.1% in August, Statistics Canada reported Friday in Ottawa, as declines in the retail and oil and gas industries partly offset increases in the wholesale and finance sectors.

That followed a flat GDP reading in July, which missed expectations for a 0.1% increase in a Bloomberg survey. 

Bonds rallied after the numbers were released, driving the Canada two-year benchmark yield to 4.876%, down more than 4 basis points, the lowest intraday level since Sept. 19. 

The economy is now on track to expand at a 0.2% annualized rate in the third quarter, if September output is flat. That’s weaker than the 0.4% consensus estimate in a Bloomberg survey. 

Although that means Canada could escape a technical recession with this rebound after a second-quarter contraction, the pace of growth is far weaker than the 2.6% seen during the first three months of this year.

The report points to an economy that’s still in a soft patch as interest-rate increases weigh on indebted households and restrain spending. It leaves room for the Bank of Canada to hold short-term borrowing costs steady in late October, despite a worsening inflation backdrop.

The consumer price index rose 4% in August, the second straight month of acceleration and double the central bank’s target, with core inflation still elevated.

Governor Tiff Macklem and his officials were counting on softer consumer activity to translate into slower price increases in the coming months. They stepped to the sidelines in a rate decision in early September, saying excess demand in the economy was easing. Friday’s data support that view.

“While inflationary pressures remain sticky above the Bank of Canada’s target range, the slowing in the economy should give central bankers confidence that their medicine is slowly working,” Royce Mendes, head of macro strategy at Desjardins, said in a report to investors. “As the economy continues to cool from the lagged impacts of rate hikes, price pressures should dissipate further.”

Manufacturing Slump

This is the only GDP release before the next rate decision on Oct. 25, when the central bank will also release a new set of economic projections. The majority of economists in a Bloomberg survey expect the bank to hold the policy rate steady at 5%, with five out of 30 forecasters seeing a 25 basis-point hike.

In July, services industries rose 0.1%, while goods-producing sectors contracted 0.3%.

The manufacturing sector — which had the largest negative contribution in July — declined 1.5%, the second straight monthly contraction, due to lower inventory formation. The port strike in British Columbia affected chemical manufacturing the most, with the subsector seeing a 3.6% decrease.

Transportation and warehousing contracted 0.2%, with air transportation being the largest contributor to the sector’s decline. Professional, scientific and technical services shrank 0.2%, the first drop in eight months.

Oil and gas extraction rose 1.5% in July, up for the sixth time in the last seven months. Finance and insurance increased for the third consecutive month, up 0.3%. Real estate, rental and leasing edged up 0.1%, continuing growth since November 2022.

Mining, excluding oil and gas, and accommodation and food services grew in July, after experiencing declines a month earlier due to forest fires. The former increased 4.2% and the latter rose 2.3%.

“While some disruptions have compromised the ‘cleanliness’ of recent GDP data, the bigger picture is that Canada is really struggling to grow right now,” Robert Kavcic, an economist at the Bank of Montreal, said in a report to investors. He added that real GDP looks “even weaker” when considering that the population is exploding.

“The Bank of Canada still has their eyes on stubborn core inflation and firm wage growth, but struggling growth argues for them to remain on hold and lean on the tightening that has already been put in place.”

(Adds economist comments in paragraphs 10 and 17-18.)

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