Canadian GDP grows 0.2% in May, BoC still on track to cut rates
Penelope Graham, Head of Content
Canada’s economy posted a stronger-than-expected showing this morning – but rate watchers fear not, as the Bank of Canada remains firmly on track for a cut this September.
According to the latest data drop from Statistics Canada, Canadian Gross Domestic product rose by 0.2% in May, following April’s 0.3% uptick. This was slightly higher than the 0.1% consensus that was expected by economists and also comes in higher than the stat agency’s own flash estimate of 0.1%.
The main contributor to growth was the goods-producing industry, which rose 0.4%. Service-producing industries also increase by 0.1%. Overall, StatCan reports, 15 out of the 20 tracked sectors expanded in May.
StatCan also released its flash estimate for June, indicating they expect 0.1% growth to have occurred last month. This is due to an increase in spending in construction, real estate, rental and leasing, and finance and insurance, though they believe manufacturing and wholesale trade will decline next month. They will update their flash on August 30, which will be the release for the June data.
Economy growing slower than Bank of Canada forecast
Overall, taking the June flash into account, it’s expected now that the economy expanded by 0.5% in Q2. According to an analysis by Desjardins Principal Economist Marc Desormeaux and Economic Analyst LJ Valencia, that would amount to annualized growth of 2.2% in Q2, and to a Q3 estimate of just above 1%. This is well below the 2.8% called for in the Bank of Canada’s last Monetary Policy Report – and that bodes well for lower interest rates to come.
Despite coming in stronger than expected, Desjardins points out that real GDP continues to lag the pace of population growth, and that per-capita output (economic growth per person) continues to fall, as it has for six of the last seven quarters. This is a streak not previously seen outside of a recession, the authors write.
“Given that job creation is being far outpaced by headcount gains, all signs suggest economic slack continued to increase in the second quarter,” they state.
“In all, solid headline GDP gains don’t change our call that the BoC will cut its policy rate again in September. Following ongoing labour market softness, the continued easing of price pressures and increasingly dovish language in last week’s MPR, more per-person economic weakness adds to the case for additional monetary easing.”
BoC likely to stick with quarter-point cuts
Douglas Porter, Chief Economist and Managing Director Economics at BMO, writes that the May numbers outpaced the lenders’ initial 1.5% estimate for the quarter, but points out that GDP has increased just over 1% compared to last year. Combined with soaring population numbers, “slack is still building” in the economy, he says.
In all, the slightly stronger GDP showing won’t derail the Bank of Canada’s plan for an additional rate cut, though Porter points out that it should remove any speculation of decreases larger than 25 basis points, such as a half-point cut.
“Such a rapid step-up in easing would require extremely weak data and/or much milder core inflation,” he writes. “Canada's economy is still walking that fine line of struggling to keep upright, but just staying out of serious trouble, consistent with continued, measured interest rate cuts.”
The next Bank of Canada announcement is scheduled for September 4, 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.