Contraction ‘only a matter of time’: What the GDP numbers say about Canada’s economy

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Canada’s economy avoided contraction in July, expanding 0.1 per cent, according to data released Thursday by Statistics Canada.

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The reading “surprised to the upside” by beating estimates that there would be a pullback of 0.1 per cent for the month.

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However, economists warned not to get “too excited” as the numbers further confirm that growth has slowed significantly in the third-quarter.

Canada’s national data agency also issued an advance reading of flat growth for August.

Here’s what economists are saying about the GDP numbers:

James Orlando, director and senior economist, TD Economics

“Today’s GDP release surprised to the upside, with the materials sectors taking the lead on the back of high commodity prices. Though there was noticeable weakness in some consumer-facing sectors, today’s print combined with the August forecast reaffirms our tracking for the third quarter of around 1 per cent. That’s pretty good considering the backdrop of high inflation and rapidly rising interest rates that are weighing on the economy. For the Bank of Canada, it needs to see further slowing in the economy in order to ease inflationary pressures. We have seen this already in recent labour market indicators, but GDP continues to remain in positive territory. How long this will last is uncertain, especially given our expectation that the BoC will get rates to 4 per cent by year-end.”

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Benjamin Reitzes, Canadian rates & macro strategist, BMO Capital Markets

“The surprise increase in July GDP puts Q3 growth on better footing than expected. Quarterly GDP is on track for a modest gain, in line with our call for a one per cent annualized increase. However, after a solid first half of the year, momentum appears to be slowing as multi-decade high inflation and rapidly rising interest rates weigh on the economy.”

Stephen Brown, senior Canada economist, Capital Economics

“Strong gains in the natural resource sector will prevent the economy from contracting this quarter but, with the business surveys deteriorating and the global economy facing recession, it looks increasingly likely that GDP growth will turn negative in the coming quarters. The 0.1 per cent month over month rise in GDP in July was better than the preliminary estimate of a 0.1 per cent m/m fall. As has been the case in recent months, the surprise was largely due to large movements in oil & gas extraction GDP. Together with the preliminary estimate that GDP was unchanged in August, the data imply that third-quarter GDP growth should be around 1.2 per cent annualized, a little higher than our current forecast of 0.8 per cent but still below the economy’s potential of closer to 2 per cent. While the economy looks set to continue expanding for now, the Bank’s rapid tightening and the worsening global backdrop suggest that it is only a matter of time before activity contracts.”

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Charles St-Arnaud, chief economist, Alberta Central

“Today’s release of the GDP for July confirms that growth has slowed rapidly in the third quarter of 2022, with growth at its weakest since 2021Q2 when restrictions to slow the spread of COVID were in effect. The report shows that rate-sensitive sectors are feeling the impact of rising interest rates. We expect growth in Canada to remain anemic in the second half of 2022 as the impact of fast-rising interest rates starts to impact the broad economy. As such, the “Great consumer squeeze,” an erosion of purchasing power and rising debt-service cost, will slow household spending meaningfully. The decline in retail trade in July indicates it is happening. Therefore, despite slowing growth momentum, we believe the BoC will continue to increase interest rates, hiking by 50bp in October. For Alberta, the details available in the report suggest that economic activity bounced back in July due to a rise in oil and gas extraction and agriculture. High energy prices are expected to be a tailwind to the Alberta economy this year. This will mean that the slowdown in economic activity in Alberta in the second half of the year is likely to be less pronounced than in the rest of Canada.”

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Andrew Grantham, CIBC Economics

“With July and August combined showing no material advance in the Canadian economy, Q3 GDP is tracking just under a one per cent annualized growth pace. That’s well below the Bank of Canada’s July forecast of two per cent, although the monthly industry figures and subsequent expenditure data don’t always line up. With inflation still high, policymakers are likely to press ahead with another rate hike next month. However, signs of consumer spending weakening even in some service industries should see the Bank then take a pause to more fully assess how growth and inflation are responding to higher interest rates.”

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Matthieu Arseneau and Alexandra Ducharme, National Bank of Canada Financial Markets

“GDP surprised the consensus of economists in July with a slight increase. But this progress will not prevent the Canadian economy from experiencing a significant moderation in the third quarter after the solid growth recorded in the previous one. Indeed, two months into the quarter, GDP is showing modest growth of 0.7 per cent annualized (including August’s preliminary estimate). This is consistent with the weak labour market in recent months which has led to an increase in the unemployment rate. Unsurprisingly, rising interest rates have negatively impacted the construction, financial and real estate sectors in recent months. For its part, the consumer, affected by both the loss of purchasing power and rising interest bills, is also showing signs of weakness as evidenced by the downward trend in retail sales. Wholesale trade activity is also struggling in 2022, which has led to a significant increase in inventories. All in all, GDP numbers published today reinforce our view that inflationary pressures from goods could fade quickly, especially since several countries are on the verge of full-blown recessions.”

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Randall Bartlett, senior director of Canadian economics, Desjardins

“Today’s upside surprise in July real GDP growth helped to solidify our tracking for Q3 real GDP growth at around one per cent annualized. This firms up our view that the Bank of Canada will hike by an additional 50 bps at its October meeting. However, at one per cent, this is half the pace of Q3 real GDP growth forecasted by the Bank of Canada in its July 2022 Monetary Policy Report and a third of the pace seen in the first half of the year. So, make no mistake – the Canadian economy is slowing, and a prolonged pause in rate hikes after Q4 remains likely.”

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