Canadian economy grew by 0.2% in July, falling behind Bank of Canada’s forecast

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Canada’s gross domestic product rose by 0.2 per cent on a month-over-month basis in July and a flat early estimate for August suggests third quarter growth will lag the Bank of Canada’s 2.8 per cent forecast, keeping the path open for further interest rate cuts.

“Canadian real GDP growth is tracking below 1.5 per cent in the third quarter, below potential and even below the modest pace of the past year,” said Douglas Porter, chief economist at the Bank of Montreal, in a note to clients following Friday’s data release from Statistics Canada. “This means that even further slack in opening up in the economy, which will eventually put more downward pressure on inflation.”

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Inflation fell to the central banks two per cent target in August and Governor Tiff Macklem said growth will need to pick up so that inflation does not fall further below that level.

The bank has made three consecutive cuts to its policy rate since June, with its next interest rate announcement scheduled for October. Economists say this latest data strengthens the case for a steeper 50 basis-point cut, but jobs data set to be released next month may be the deciding factor.

“For the Bank of Canada’s October announcement, the upcoming employment report will be key in determining whether a 25-basis-point or 50-basis-point cut is necessary, with today’s data not enough to sway us from our 25 basis pint call at this point,” said Katherine Judge, an economist at the Canadian Imperial Bank of Commerce, in a note.

Nathan Janzen, assistant chief economist at the Royal Bank of Canada, thinks cuts will tilt steeper “should the economy deteriorate significantly further.”

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The services-producing sector grew by 0.2 per cent in July, driven by retail services, finance and the public sector. The goods-producing sector grew by 0.1 per cent, driven by manufacturing and utilities. Overall, 13 out of 20 sectors expanded in July.

Construction contracted for the second month in a row by 0.4 per cent and “was the largest detractor to growth,” as most of its subsectors reported decreases. Transportation and warehousing also declined by 0.4 per cent, due negative impacts from the wildfires, Statistics Canada said.

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