Q2 and June GDP surprise on the upside, but won’t derail Bank of Canada rate cuts

Canadian economic growth came in stronger than expected for the month of June and for the second quarter as a whole – but there’s little doubt that our central bank remains in position to pass on another quarter-point cut next week.

According to Statistics Canada, the Gross Domestic Product measure (GDP) grew at an annualized rate of 2.1% in the period between April and June. In June itself, growth remained flat, up 0.1%.

Higher government spending, business investment in engineering structures and machinery and equipment, and household spending on services, were largely responsible for pushing growth higher, despite slowdowns in residential construction and overall household spending on goods, StatCan says.

However, the per-capita GDP measure – which tracks how individual Canadians are being impacted by the economy – continued to slow, falling 0.1% – down for the fifth quarter in a row.

Surprise strength is temporary

The latest GDP numbers surpassed economists’ expectations, including the Bank of Canada’s forecast, which called for quarterly growth of 1.5%. In a forward-looking guidance note issued earlier this week, RBC economists wrote they expected a 1.4% increase in Q2.

However, the stronger-than-expected showing won’t derail the central bank’s downward cutting path – at least, in this upcoming announcement. July’s promising inflation progress – in which Canadian CPI came in at 2.5% – has more than sealed the deal for a cut in the Bank’s next scheduled announcement on September 4. 

As BMO Chief Economist and Managing Director of Economics Douglas Porter points out, the quarterly result is likely due to stronger growth seen in the spring, before entering a “soggy” summer. 

“The Canadian economy is still managing to grind out modest growth, but the path is rocky,” he writes in an economic update. “However, the monthly updates suggest that the firm spring performance gave way to a slower summer, as a flat reading for June looks to be followed by a similar result in July (on the flash estimate today). The early read on July is a clear disappointment, given some hints that activity picked up last month, and it casts some serious doubt on the BoC's above consensus call of 2.8% growth in Q3.”

Bank of Canada remains on rate cut track

That GDP gains continue to perform well under population growth will prevent the measure from any solid gains, Porter adds, and the fact that consumer spending and housing investment both tumbled indicates pain being felt at the household finances level. In fact, should growth slow even further in coming months, it could open the door to larger cuts from the central bank.

“These results probably don't change anything significantly for the Bank of Canada next week—for example, we are maintaining our estimate of annual GDP growth for both this year (1.1%) and next (1.8%),” he writes. “A third consecutive 25 bp cut is expected next week. However, if Q3 comes in far below the BoC's forecast and the jobless rate continues to forge higher (August data out next Friday), that could open the door to potentially more aggressive cuts later this year—especially if the Fed is also tilting that way in the Fall.”

Also read:

• What the “me-cession” means for you – and how to ride it out
• Canadian CPI lowers to 2.5% in July
• Rate cuts improved overall home affordability in July
• US inflation slows to 2.9% in July