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Canadian GDP falls in Q2 2023

Weak GDP data means Bank of Canada rate hikes could be “over and done”

Canada’s economy slowed more than expected in the second quarter, raising the likelihood that the Bank of Canada will leave rates unchanged at next week’s policy meeting.

Statistics Canada reported that real GDP dipped 0.2% in the second quarter, against estimates for a 1.2% rise. That’s also well below the Bank of Canada’s official GDP forecast for 1.5% growth in both Q2 and Q3.

“The small pullback in Q2 GDP lines up well with the recent rise in the unemployment rate, and reinforces the point that growth is cooling markedly, even when looking through the many special factors in recent months,” wrote BMO chief economist Douglas Porter.

Monthly growth in June also came in lower than expected, similarly falling 0.2%. StatCan’s flash estimate for July is for growth to flatline. The decline included weakness in both goods (-0.4%) and services (-0.2%).

“This combination gives a weak handoff and a soft start to Q3,” Porter added. “In stark contrast to the U.S. economy—where the debate is seemingly over whether it will be a soft landing or a no landing—it looks like Canada is already having a bit of a bumpy landing.

Bank of Canada expected to move to the sidelines

The odds of an additional Bank of Canada rate hike next week fell even further following the release of today’s GDP data. Bond markets are now only pricing in a roughly 15% chance of an additional quarter-point rate hike.

Most economists agree that today’s weaker-than-expected data will be enough to stave off any additional rate hikes this year.

“The broad softening in the domestic economy will almost certainly move the BoC to the sidelines at next week’s rate decision after back-to-back hikes,” Porter wrote. “Between the half-point rise in the unemployment rate, the marked slowing in GDP, and some cooling in core inflation, it now looks like rate hikes are over and done.”

RBC’s assistant chief economist Nathan Janzen noted that inflation remains sticky at above-target levels, today’s data shows “evidence is building” that the lagged impact of previous rate hikes is now working to cool both economic growth and labour markets.

“Policymakers will want to leave the door open to re-starting hikes again down the road if necessary,” he adds. “But if the unemployment rate continues to drift higher, as we expect, a re-start won’t be necessary.”

James Orlando of TD Economics agrees that this “cooling off” is exactly what the Bank of Canada has been hoping for to give it confidence that inflation will continue to drift lower to its 2% target.

“We think it will continue, justifying our call for the BoC to remain on the sidelines for the rest of this year,” he wrote.

Housing a drag on the economy

Looking at the details of the report, housing was once again one of the biggest drags on economic performance. Housing investment was down 2.1% quarter-over-quarter with new construction falling 8.2%.

StatCan said the decline in new construction activity was experienced in every province and territory with the exception of Nova Scotia. Renovation activity was also down 4.3%.

“New construction and a lack of renovation activity weighed on the sector, as high interest rates continue to curb activity,” Orlando noted. “While there was a bounce back in real estate transactions during the spring, this wasn’t enough to provide an offset.”

The report also showed that household disposable income rose by 2.6% in the quarter, reversing a 0.6% decline in the previous quarter. This was attributed to a rise in employee compensation of 2.2% and non-farm self-employment income of 3.1%.