August GDP sees 0% growth, supporting future rate cuts

The Canadian economy’s lackluster performance continued through the end of summer, with zero Gross Domestic Product (GDP) growth in the month of August, after ticking up by a revised 0.1% in July, reports Statistics Canada.

According to the report, a sluggish manufacturing sector pulled growth down, as goods-producing industries fell by -0.4% to their lowest since December 2021. Transportation and warehousing also contracted for the second month in a row, largely affected by the brief work strikes among Canada’s two main rail carriers during the month. Growth was concentrated in the service-producing industries, which rose 0.1%.

However, StatCan expects conditions to pick back up with a 0.3% increase in September, with anticipated improvements in the finance, insurance, construction, and retail segments; that report, which will be officially released on November 29, would suggest the economy expanded by 1% in the third quarter – though that's still below the Bank of Canada’s own forecast of 1.5%. 

More GDP data needed before next BoC announcement

This “mildly disappointing” report certainly leaves the door open to more rate cuts from the central bank, writes Douglas Porter, Chief Economist and Managing Director of Economics at BMO. However, he points out, as the BoC will have its hands on the following month’s set of GDP data before its next December 11 rate announcement, the August data will do little to influence the size of the next rate decrease. 

“The latest economic figures suggest ongoing weakness in the Canadian economy, giving the central bank room to continue cutting interest rates,” he writes. “But the size of that cut is still uncertain, with lots more data to come on inflation and the economy before the Bank of Canada’s next rate decision on Dec. 11.”

The central bank has now delivered four rate decreases since June, bringing Canada’s benchmark borrowing rate down to 3.75% from its previous 5%. Its last decrease, carried out on October 23, was a “jumbo” half-point cut rather than the usual quarter, in response to September’s weak inflation report.

Lowering this rate impacts all variable-based borrowing products including variable mortgage rates and HELOCs, as well as savings and investing products such as high-interest savings accounts and guaranteed income certificates (GICs).

Canadian and US economy continue to deviate

What likely will be on the BoC’s radar, though, is how much the Canadian economy’s path is starting to deviate from the US. The American GDP report, out earlier this week, showed US GDP grew 2.8% in Q3 – below the anticipated 3.1%, and Q2’s recorded 3%, but still above Canada’s progress. Consistently stable employment and inflation have also raised doubts that the US Federal Reserve – the American counterpart to the BoC – will need to cut its own benchmark rate as aggressively as previously thought.

Downward pressure on the Loonie

That puts the BoC in a position where it will need to lower interest rates more quickly, and by a larger margin than in the US – and that can put downward pressure on the Canadian dollar.

As reported by the Financial Post, Scotiabank analysts wrote in an economic note that, “The BoC seems ready to do whatever it takes to reflate an economy running below its potential, even leaving the door wide open to another outsized move at the next meeting. On the other end the Fed is unlikely to repeat its 50 bp move of September.”

“Again we have two central banks heading in the same direction: one is walking, the other is running.”

The Scotiabank economists anticipate that should the Loonie break out of its current range of 72 to 76 cents USD, it could plunge to a previous two-decade low of 68 cents, on par with the dollar’s performance in the early days of the pandemic.

Overall, today’s GDP report indicates more data is needed by the BoC as it mulls over its next rate decision. However, BoC Governor Tiff Macklem has made it clear that another half-point cut could be in the cards should the economy call for it. In a federal Senate committee this week, he stated the BoC is taking it “one meeting at a time”, demonstrating “we’re prepared to do a 50-basis-points cut if we think that’s appropriate. And if we think it’s appropriate to do it again, we’ll do it again.”

Also read:

• Bank of Canada cuts target interest rate by 0.5% in October announcement
• Canadian CPI falls to 1.6% in September
• Inflation and the Consumer Price Index in Canada
• Canadian GDP grows 0.2% in July, signs point to cooling economy