Canadian GDP grows 0.2% in July, but signs point to cooling economy
Penelope Graham, Head of Content
The Canadian economy performed slightly stronger than was expected in July, ticking up 0.2%, but Statistics Canada says to expect a flat August as economic conditions continue to weaken.
The monthly measure came in higher than the 0.1% growth expected by analysts, and occurred despite negative impacts from wildfires says StatCan. Overall, 13 of the 20 sectors tracked by the statistics agency saw growth, much of which was driven by the services-producing industry, which rose 0.2%, fueled by retail trade, the public sector, and finance and insurance. Goods-producing industries also increased by 0.1%, led by utilities and the manufacturing sectors.
Also read: Q2 GDP surprises on the upside, but won’t derail BoC cuts
Economy to chill further in the fall
However, the effects of this uptick are expected to be temporary, with the real takeaway pointing to a continued chilling of the economy throughout the summer months. That sets the stage for just 1% annualized growth in Q3, should the September numbers also come in flat.
That’s well below the forecasted 2.8% called for by the Bank of Canada (BoC), write RBC economists Nathan Janzen and Abbey Xu, who add that the central bank is focusing on how quickly the economy is softening – along with the rising unemployment rate – now that inflation has been pulled back down to its 2% target.
Janzen and Xu’s rate cut forecast, which was released before the GDP report came out, leans toward another quarter-point cut from the BoC in its October 23rd announcement but with “risks tilted to a faster pace of reductions (in line with the U.S. Federal Reserve’s larger 50 bps initial cut) if the economy softens significantly further.”
GDP report boosts the chance of a half-point rate cut
That the US Fed kicked off its rate cutting cycle with a half-point cut on September 18 has led money markets to price in a 50% chance that the BoC’s next rate move will be a jumbo cut as well.
A larger cut would also be supported by most recent Canadian Consumer Price Index (CPI) report, which showed inflation has finally come down to its 2% target, meaning benchmark interest rates can start to lower at a faster cadence. Combined with concerns that the economy may be slowing at too rapid a pace, this puts the BoC in a position to cut rates quickly – perhaps more briskly than initially expected. Currently, there are two more interest rate cuts forecasted in October and July this year, and anywhere between four to six in 2025, which could bring the Overnight Lending Rate back down to a range of 2.5 - 2.75%.
That would in turn significantly lower Canada’s prime rate, and, by extension, variable mortgage rates, which lenders base on prime plus or minus a percentage. Variable mortgage rates have already started to come down following three quarter-point cuts from the BoC (totalling a cumulative 75 basis points).
Fixed mortgage rates, while not directly governed by the Bank of Canada, are still greatly influenced by its cuts and economic trends, via reaction in the bond market. The five-year government of Canada bond yield dipped by down to the 2.7% range following the release of soft July GDP report, which will give lenders the room to further discount their fixed mortgage rates. Currently, the lowest five-year fixed mortgage rate in Canada is 3.94% – a low not seen since the summer of 2022.
With rates trending lower, it’s a great time for those shopping for a new mortgage rate, or coming up for renewal, to explore their options at various lenders – especially as the mortgage stress test will no longer apply to those making a switch to a new bank at renewal time, as of November 21st.
The next Bank of Canada announcement is October 23, 2024.
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Penelope Graham, Head of Content
Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.