In July, experts had predicted the economy would grow by 0.1 percent for the month. (AP Photo/Damian Dovarganes) (Associated Press)
Canada's economy experienced a slight boost in July, growing by 0.2%, surpassing analysts’ predictions of a 0.1% increase, according to Statistics Canada. However, the optimism was short-lived, as preliminary data for August indicated no economic growth, signalling a potential slowdown. Key sectors like oil and gas extraction, as well as the public sector, managed to offset declines in manufacturing, transportation, and warehousing.
Royce Mendes, managing director at Desjardins, noted that despite July’s growth, August’s stagnation brings the economy's overall third-quarter growth estimate to just above 1%, far below the Bank of Canada's forecast of 2.8%. This sluggish performance has fuelled speculation that the Bank of Canada could introduce a significant interest rate cut of 50 basis points at its next policy meeting on October 23.
The financial markets are currently divided on whether the bank will make such a bold move, with about a 50% chance of a 50 basis-point cut, according to Reuters. Another 25 basis point reduction in December is almost certain. This speculation has intensified following a speech by Bank of Canada Governor Tiff Macklem, who indicated that further rate cuts might be necessary if inflation remains at the desired 2% target, which was met in August.
Macklem expressed hope for stronger economic growth to ensure inflation stays at target levels but admitted that recent indicators suggest the economy is not performing as expected. The central bank's focus is now on monitoring labour and inflation data to determine the necessity and size of future rate cuts.
BMO chief economist Douglas Porter echoed this concern, pointing out that while inflation may have stabilized, GDP growth has not been as strong as anticipated. With the unemployment rate climbing to 6.6%, the outlook for growth remains below expectations, increasing the likelihood of more aggressive rate cuts.
Some economists, however, remain skeptical about the need for a substantial 50 basis-point reduction. Katherine Judge, an economist at CIBC, suggested that upcoming employment data could play a key role in shaping the central bank's decision. CIBC currently expects the Bank of Canada to make a smaller 25 basis point cut in October, with larger cuts possible in December and January, depending on how the economy performs.
TD economist Marc Ercolao supported this cautious stance, stating that Friday’s data doesn't drastically shift the scales toward a more substantial rate cut. He emphasized that more weight would be placed on the upcoming labour market and inflation data to ensure that inflation remains at the 2% target.
Statistics Canada highlighted that the retail trade sector, with a growth of 1%, was the biggest contributor to July's economic growth, its largest monthly increase since January 2023. Additional gains were seen in the public sector, finance, and insurance sectors. Despite the growth, wildfires negatively impacted transportation, warehousing, and accommodation services, affecting overall performance.
In July, service-producing industries grew by 0.2%, while goods-producing sectors saw a modest expansion of 0.1%.
