Home BusinessEconomic News Canada Economic Growth Misses Forecasts, Backing Rate Pause

Canada Economic Growth Misses Forecasts, Backing Rate Pause

by Stella Morgan

The Canadian economy showed signs of a slight rebound in August, but overall growth remained stagnant, further reinforcing the case for the central bank to maintain interest rates despite persistent inflation. Preliminary data released by Statistics Canada indicated that the gross domestic product (GDP) grew by a meager 0.1% in August. This marginal growth came as declines in the retail and oil and gas industries offset modest increases in the wholesale and finance sectors.

The latest figures followed a flat GDP reading in July, which fell short of expectations for a 0.1% increase. The continuous lackluster growth is worrying, especially considering that earlier this year, Canada experienced a robust GDP growth rate of 2.6% during the first three months. If September’s output remains flat, the economy is projected to expand at an annualized rate of 0.2% in the third quarter. This estimate is weaker than the 0.4% consensus forecast in a survey conducted by Bloomberg.

While this rebound might spare Canada from entering a technical recession following a contraction in the second quarter, the overall growth rate falls far short of earlier predictions. The report indicates that the economy is still going through a soft patch due to increased interest rates burdening heavily indebted households and causing a decline in spending.

Nevertheless, the lackluster growth provides the Bank of Canada with ample justification to maintain short-term borrowing costs steady later this month. Despite inflation remaining elevated, the central bank can use the sluggish economic growth as a reason to withhold interest rate increases. The consumer price index rose by 4% in August, marking the second consecutive month of accelerated inflation and doubling the central bank’s target. Core inflation also remains high.

The Bank of Canada was hoping that reduced consumer activity would lead to slower price increases in the coming months. The central bank abstained from raising interest rates in early September, stating that excess demand in the economy was subsiding. Friday’s data reinforces this perspective.

Economists argue that the slowdown in the economy should provide policymakers with confidence that their measures are gradually taking effect. Royce Mendes, head of macro strategy at Desjardins, stated in a report to investors that “as the economy continues to cool from the lagged impacts of rate hikes, price pressures should dissipate further.”

The release of these GDP figures is significant as it is the only data release before the Bank of Canada’s next rate decision, which will also include new economic projections. A Bloomberg survey indicates that the majority of economists expect the bank to maintain the policy rate at 5%, with only five out of 30 forecasters predicting a 25 basis-point increase.

Looking at the sector-wise performance in July, services industries experienced a 0.1% increase, while goods-producing sectors contracted by 0.3%. Notably, the manufacturing sector witnessed a second consecutive decline of 1.5% due to lower inventory formation. The chemical manufacturing subsector was particularly affected by the port strike in British Columbia, experiencing a 3.6% decrease. Transportation and warehousing, as well as professional, scientific, and technical services, also contracted by 0.2%.

However, there were some positive areas of growth in the Canadian economy. Oil and gas extraction increased by 1.5% in July, marking its sixth increase in the last seven months. Finance and insurance also experienced a third consecutive month of growth with a 0.3% increase. Additionally, real estate, rental, and leasing saw a marginal increase of 0.1%, continuing its growth trend since November 2022.

Mining, excluding oil and gas, and accommodation and food services also recorded growth in July after experiencing declines in the previous month due to forest fires. The former grew by 4.2%, while the latter rose by 2.3%.

Despite some temporary disruptions in the data due to external factors, it is evident that the overall Canadian economy is struggling to grow. Robert Kavcic, an economist at the Bank of Montreal, commented in a report to investors that when considering the country’s exploding population, the real GDP appears even weaker.

He argues that while the Bank of Canada is closely monitoring persistently high core inflation and steady wage growth, the current economic situation supports a decision to maintain interest rates and rely on the tightening measures already in place.

In summary, the Canadian economy’s marginal rebound in August does little to alleviate concerns about its overall lack of growth. With inflation remaining elevated, the central bank is likely to keep interest rates unchanged, using the sluggish growth as a reason for maintaining the current monetary policy. While certain sectors experienced growth, the economy as a whole continues to struggle, prompting economists to urge caution and a reliance on already implemented measures.

related posts