Slowing economic growth could keep the Bank of Canada on hold
The latest barometer of Canada’s economic growth is being described as “disappointing,” which some say could be enough to avoid any further Bank of Canada rate hikes.
The country’s gross domestic product (GDP) rose 0.3% in May on a monthly basis. That was slightly less than economists had expected and followed an upwardly revised 0.1% growth rate in April.
In its release today, Statistics Canada also released its preliminary estimate for June, which is for a 0.2% monthly contraction. If that figure holds, it would result in an annualized growth rate of approximately 1% to 1.2% in the second quarter.
That’s a slowdown from the 3.4% rate recorded in the first quarter, and below the Bank of Canada’s forecast for 1.5% growth in Q2, which it released in its latest Monetary Policy Report.
“This is a somewhat disappointing suite of figures,” noted BMO chief economist Douglas Porter. But he said the under-performance of the Canadian economy “is no shock” given the impacts of wildfires, a civil servant strike and production issues in the automotive sector.
Diving into the details
The StatCan report revealed that 12 of 20 sectors posted increases in May. The largest gains were seen in wholesale trade (+2.9%) and manufacturing (+1.6%), both of which were boosted by increased auto production as chip shortages continue to be addressed.
Higher resale housing demand, particularly in the markets of the Greater Toronto Area, Montreal, Greater Vancouver, Calgary, Edmonton and Ottawa, also contributed to overall economic growth, Statistics Canada said.
The offices of real estate agents and brokers, and activities related to real estate, posted a 7.6% increase in May, marking its fourth consecutive monthly gain.
Overall, the real estate and rental leasing sector was up 0.5% month-over-month and 2% compared to last year.
Meanwhile, gains in some sectors were tempered by a 2.9% drop in mining and oil and gas, due to a slowdown in energy production due to wildfires.
The outlook for future Bank of Canada rate moves
Indications of softening growth, and even potential contractions, could be enough to keep the Bank on the sidelines going forward, some economists say.
“The bigger picture is that growth is going to struggle to stay firmly in the positive column in the second half of the year,” Porter said.
That would be welcome news for the Bank of Canada, which has been trying to slow economic growth and inflation since it started its monetary policy tightening back in March of last year.
“May and June numbers suggest the Canadian economy is slowing and reinforce our view that the Bank of Canada will hold rates in September given the recent emphasis on balancing the risks of over and under tightening policy,” wrote Marc Desormeaux, principal economist at Desjardins.
TD’s Marc Ercolao agreed, suggesting that today’s data points to slowing momentum heading into the summer.
“Looking ahead, headline GDP figures may continue to be skewed by the government’s grocery rebate and the effects of the B.C. port strike in July,” he noted. “All said, slowing growth appears to be in the cards for the Canadian economy, and we believe this will be enough for the BoC to remain on hold at its next meeting.”
However, not all economists agree that the data was as weak as at first glance.
Scotiabank’s Derek Holt wrote that Canada’s economy is “considerably stronger” than the latest GDP figures suggest. “If not for the effects of various distortions, the economy may have been tracking double the growth rate in Q2 compared to the official statistics,” he noted. “That would preserve growth at a rate above potential GDP growth and continue to push the economy into excess demand conditions.”
He added that it would be “pretty silly” of the central bank to drop its rate-hike bias due to transitory shocks including the civil servant strike and wildfires.
Economists do agree that the next crucial data report will be the July employment figures, which will be released by Statistics Canada next Friday.
“We suspect that signs of continued loosening in the labour market and the trend in core inflation will be more important for the Bank as it determines whether to raise rates again or move back onto the sidelines,” noted CIBC’s Andrew Grantham.