Canada NewsEconomyNews

Bigger Bank of Canada rate cut now on the table: What economists say about GDP

Bigger Bank of Canada rate cut now on the table: What economists say about GDP

Details in report hint at a stalling economy

Article content

Canada’s gross domestic product for the second quarter came in stronger than expected, but the details of the GDP report and the accompanying outlook for the start of the next quarter hinted at a stalling economy, economists warned.

Statistics Canada said Friday second quarter GDP expanded at an annualized rate of 2.1 per cent, beating analyst forecasts for growth of 1.8 per cent and the Bank of Canada‘s projection of 1.5 per cent.

Advertisement 2

Story continues below

Article content

While there were bright spots in the report including strong investment in machinery and equipment, for example, the data also showed that consumers are tired and government spending is playing an oversized role in growth.

Here’s what economists think the latest GDP numbers mean for the Bank of Canada and its next meeting on Sept. 4 when officials are expected to cut interest rates for the third consecutive time.

‘Weak momentum’: CIBC

“Growth in the Canadian economy was modestly better than expected in Q2, but weak momentum heading into the third quarter gives ample reason for the BoC to continue cutting interest rates,” Andrew Grantham, an economist at CIBC Economics, said in a note.

June GDP came in unchanged from the month before and a Statistics Canada early estimate for July forecasts more of the same, Grantham said.

If August and September track along these same lines, Grantham estimates that annualized GDP for the third quarter will come in at 0.5 per cent, well below the Bank of Canada’s 2.8 per cent forecast in the latest Monetary Policy Report (MPR).

There’s nothing in the GDP numbers to  prevent the Bank of Canada from continuing to cut rates, Grantham said.

Article content

Advertisement 3

Story continues below

Article content

“We still see the Bank of Canada reducing interest rates by 25 basis points at each remaining meeting this year,” he said.

‘Big disappointment’: Capital Economics

While second-quarter GDP surprised to the upside, the data nonetheless opened the door to a 50 basis-point cut at the next Bank of Canada meeting, Stephen Brown, deputy chief North America economist at Capital Economics, said in a note.

“The big disappointment was that monthly GDP in June was revised down to be unchanged from May, and the preliminary estimate for July points to another unchanged reading,” Brown said.

The June and July numbers surprised the economist given that the Trans Mountain pipeline expansion started operating in early May, helping to increase energy volumes.

Regardless of how August and September play out, growth for the third quarter will likely “track” below two per cent, missing the Bank of Canada’s estimate for annualized GDP of 2.8 per cent.

“The odds still just about favour a smaller 25 basis-point cut next week, but we wouldn’t be surprised by a 50 basis-point move and there is now a good chance of a larger move at the October meeting, when the bank will update its economic forecasts,” Brown said.

Advertisement 4

Story continues below

Article content

GDP chart

‘Less impressive’: Desjardins

“Most of the gains also showed up early in the (second) quarter,” said Royce Mendes, an economist with Desjardins Group.

Much of the quarter’s strength was attributed to growth in wages in the public sector, though business investment provided a boost as spending on aircraft and other transportation increased “sharply.”

But those aren’t the sectors you want to depend on for economic growth, Mendes said.

“Higher government employee compensation isn’t a sign of underlying strength in the economy and aircraft purchases tend to be lumpy, meaning that they can’t be counted on to continue at that pace,” he said. “As a result, the Q2 GDP beat is less impressive than the headline might indicate.”

Looking ahead, Mendes estimated that the third quarter could grow at one per cent to 1.5 per cent annualized — “roughly half the pace that the Bank of Canada had forecast in its July MPR.”

The “headline beat” in the second quarter is not a game-changer for the Bank of Canada.

Given the underlying weakness in the report, Mendes also thinks a bigger rate cut is now on the table.

Advertisement 5

Story continues below

Article content

“While our base case still sees 25 basis-points rate cuts being the norm, the risks surrounding that forecast are now clearly tilted towards something larger,” he said.

‘Softening backdrop’: Royal Bank of Canada

“By our count a surge in government spending accounted for 80 per cent of the Q2 GDP increase,” Abbey Xu, an economist at Royal Bank of Canada, said in a note, adding that on a per-capita basis, GDP is down for a fifth consecutive quarter.

In her note, Xu highlighted that spending on goods declined by one per cent in the second quarter. Services spending increased, but growth slowed by more than half from the first quarter, she said.

“The monthly data is reinforcing a loss of growth momentum towards the end of Q2,” Xu said, noting that growth in May was revised down to 0.1 per cent from 0.2 per cent, while June growth was flat.

Slowing inflation and rising unemployment reinforce a “softening economic backdrop,” the economist said, adding that RBC expects the Bank of Canada to cut again by 25 basis points in September.

‘Cautious’ households: Albert Central

Without government spending, second-quarter GDP would have come in at 0.7 per cent annualized instead of 2.1 per cent, said Charles St-Arnaud, chief economist at credit union Alberta Central.

Advertisement 6

Story continues below

Article content

Besides government coffers, St-Arnaud said “population growth remains a significant source of growth” although on a per-capita basis, consumer spending declined 0.4 per cent quarter over quarter.

Recommended from Editorial

  1. Commercial trucks and passenger vehicles drive across Ambassador Bridge on the Canada-U.S. border in Windsor, Ont. Canada's economy grew at an annualized rate of 2.1 per cent in the second quarter.

    Economy beats Bank of Canada forecast with 2.1% growth

  2. None

    Bank of Canada to cut rates deeper, faster, economists say

There were many signs in the report that consumers are wary.

For example, St-Arnaud estimates that consumer spending contributed a meagre 0.3 percentage points to growth in the second quarter. Further, the savings rate rose to 7.2 per cent — the highest since 1996 outside the pandemic — “suggesting that households continue to be cautious with their spending and higher interest rates are making saving more attractive.”

St-Arnaud said the overall weak report and outlook for the third quarter will reinforce the Bank of Canada’s intention to cut in September. He expects the central bank will also cut in October and December “bringing the policy rate to 3.75 per cent.”

• Email: [email protected]

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Article content

Comments

Join the Conversation

Featured Local Savings

View Article Origin Here

Related Articles

Back to top button