Soft July GDP supports October rate hold

Soft July GDP supports October rate hold

The latest snapshot of Canada’s economic growth was released this morning, bolstering rationale that the Bank of Canada will continue to hold rates over the coming month.

The gross domestic product measure was “essentially unchanged” in July, reports Statistics Canada, coming in below an expected 0.1% increase. That follows the -0.2% dip recorded in June; meanwhile, preliminary forecasts are pointing to a scant 0.1% uptick in August. 

According to StatCan, the greatest declines were seen in the manufacturing sector, as well as oil and gas, which are still bearing the effects of the summer wildfires. Improvements were centred in the finance sector, while real estate and renting inched up by 0.1%, as rising mortgage costs took a bite out of purchasing power.

“Interest rate hikes in both June and July may have deterred some buyers in the month. Despite increasing activity in the majority of markets in July, declines in the Greater Toronto Area along with the Fraser Valley more than offset those increases,” states StatCan’s report.

Overall – assuming the stagnancy continues through September – the Canadian economy is on trend to grow 0.2% in Q2, lower than the 0.4% initially forecasted by the central bank, and well below the 2.6% increase seen in Q1.

Today’s report will be a crucial consideration for the Bank of Canada as it makes its pending rate decision on October 25th; softer economic growth is a key indicator that the series of 10 rate hikes implemented thus far are indeed having their intended impact in slowing inflation – badly needed reassurance following August’s hotter-than-expected headline number of 4%. Analysts are now largely calling for a rate hold as a result of today’s reading.

“While some disruptions have compromised the ‘cleanliness’ of recent GDP data, the bigger picture is that Canada is really struggling to grow right now,” writes Robert Kavcic, Senior Economist and Director of Economics at BMO.

“Real GDP is little changed over the past six months, which looks even weaker when considering that the population is exploding at a 3% per-year run rate. 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.”