Economics

By Nathan Janzen

• The 0.2% increase in GDP in July was stronger than the “essentially unchanged” advance estimate a month ago, but still leaves growth in Q3 as a whole tracking below the BoC’s 2.8% forecast in July, and down on a per-capita basis for a sixth consecutive quarter.
• The increase in July output was despite some negative impact from wildfires that will reverse in coming months. But the early estimate for August output was still ‘essentially unchanged.’ Those early estimates have been exceptionally revision prone, and early reports on wholesale and manufacturing sales for August are pointing to some early downside risk.
• For Q3 GDP growth as a whole, the monthly GDP numbers are still tracking broadly in line with our own 1.0% (annualized) assumption – still below the pace of population growth and implying yet another decline on a per-capita basis.
• Details behind the July GDP increase were mixed – growth in direct government administration has accounted for roughly a quarter of GDP growth over the last three months (by our count), with a third consecutive 0.4% increase in public administration in August propping up services output growth.
• Retail trade also expanded by a full percentage point but output in accommodation & food services was little changed (+0.1%), broadly in line with our own tracking of card transactions.
• Manufacturing output edged up by 0.3%, retracing little of a 1.3% pullback in June. And construction spending fell by 0.4%
• Bottom line: Slowing inflation has allowed the BoC to shift focus to downside economic growth risks – with Governor Macklem reiterating after cutting the overnight rate earlier this month the need to ” increasingly guard against the risk that the economy is too weak and inflation falls too much.” Even with a tick higher in July, GDP is tracking another per-capita decline in Q3 and below the BoC’s prior forecast. The unemployment rate has continued to drift higher and inflation lower. The case for additional interest rate cuts against that backdrop is clear – we continue to expect further gradual interest rate reductions (at a 25 basis point per meeting pace) down towards a 3% overnight rate with risks tilted to larger/faster cuts should the economy deteriorate significantly further.

By Abbey Xu

• Q2 2024 GDP growth was reported at 2.1%, following a slight upward revision to the Q1 figure of 1.8% (previously 1.7%). This result is above both our expectation and the consensus before the data release.
• Details are not as strong as the headline number, by our count a surge in government spending accounted for 80% of the Q2 GDP increase. And controlling for rapid population growth, per-capita output continued to decline for the 5th consecutive quarter (and 7th of the last 8).
• Consumer spending edged up 0.6%, with diverging trends in spending on goods and services. Services spending continued its positive trajectory, increasing by 1.8% in Q2, but the pace has slowed more than half from Q1. Meanwhile, spending on goods declined by 1%.
• Residential investment dropped (-7.3%) for another quarter, and at a much faster speed, in line with weaker home sales.
• Business investment kept expanding into Q2, jumping by 11%, but boosted by a spike in imports of aircraft and transportation equipment that is unlikely to be repeated.
• A closer look at the monthly data reveals that April (+0.4%) recorded the strongest growth within the quarter, followed by a smaller gain (revised to +0.1% from +0.2% previously) in May, and flat reading in June. StatCan’s advance estimates indicated output growth was unchanged in July. These estimates are subject to revision, but the monthly data is reinforcing a loss of growth momentum towards the end of Q2.
• Household disposable incomes rose solidly again (+7%), and the household savings rate increased to 7.2%. However, these savings are likely still heavily concentrated among higher-income households and are unlikely to be spent in the near term.
• Bottom line: Although slightly above expectations, the details behind the Q2 GDP increase are softer than the headline growth rate and per-person output continues to decline. Employment has declined for two consecutive months, and the latest unemployment rate is up almost 1% from a year ago. Recent economic data indicates that inflationary pressures have broadly eased, with breadth of goods impacted by abnormally high inflation narrowing to pre-pandemic levels, and the softening economic backdrop should reinforce the Bank of Canada’s view that the economy has softened enough to keep inflation on a downward trajectory. We continue to expect the BoC to follow up cuts to the overnight rate by another 25 bps in September.

By Abbey Xu

• Canadian GDP expanded another 0.2% in May after a 0.3% increase in April. The May increase was slightly higher than both Statistics Canada’s preliminary estimate of 0.1% growth released last month, and our own expectations of a flat reading.
• The advance estimate indicated that GDP edged up 0.1% in June, although these estimates are often subject to revisions.
• On a quarterly basis, that rounds to a GDP increase of ~2% in Q2, which is higher than our tracking of an 1.4% annualized increase but would still leave per person GDP tracking another quarterly decline.
• In May, growth in the goods-producing sector (+0.4%) outpaced that of the services-producing sector (+0.1%), with most of the growth driven by higher output in manufacturing sector (+1%). StatCan attributed part of the strength in non-durable manufacturing (+1.4%) to a rebound in petroleum refineries after scheduled maintenance in the prior month, although durable manufacturing output also rose (+0.7%).
• Among other goods sectors, GDP for potash mining jumped 7.1% in May, following four consecutive monthly declines. And supporting activities for mining were up again in May, by 1.6% but were partially offset by a pullback in oil and gas extraction (-3.5%).
• In the service sector, in line with earlier industry reports were contractions in output among retail (-0.9%) and wholesale sales (-0.8%). Educational services (+0.5%), and health care and social assistance (+0.3%) – two sectors that have been growing since the beginning of the year continued their expansions into May.
• Bottom line: Today’s GDP report reveals that Canadian GDP grew slightly faster than expected in May, and was on balance stronger in Q2. Still, early indicators for June, including wholesale sales (-0.6%), manufacturing sales (-2.6%), and retail sales (-0.3%) all suggested that the momentum is waning towards the end of the quarter. Importantly, the higher than expected quarterly print would still on balance suggest another decline in per-capita GDP in Q2. We think the economic backdrop should give the Bank of Canada room to deliver another interest rate cut in their next meeting in September. We expect a total of 100 basis points of cuts to the overnight rate this year (including the 50 basis points cuts already delivered in June and July).

By Claire Fan

• Canadian GDP grew by 0.3% in April from March, with the gain evenly distributed between goods-producing and services-producing industries, both were up by a similar amount.
• The advance estimate was that GDP growth slowed to 0.1% in May. Other early indicators have been softer, including a small 0.2% increase in manufacturing sales (much of it came from aerospace that doesn’t get captured in manufacturing GDP), a 0.6% decline in retail sales and a larger 0.9% decline in wholesale sales (ex-petroleum) all in May.
• It’s worth noting that the GDP advanced estimates have a spotty record at predicting actual monthly changes in output. Still, taking it at face value, Canadian GDP as of May was tracking 1.8% (annualized) growth in Q2 from Q1, similar to but slightly above our forecast of 1.4% annualized growth in Q2 as a whole.
• Back to April, stronger production growth was seen in wholesale sales (+2%) and support activities for oil and gas extraction (+6.9%). The prior was boosted by a surge in auto and parts wholesaling and the latter was ahead of the start of TMX pipeline operations in early May.
• Outside of those sectors, output also grew more for manufacturing (+0.4%), finance and insurance and arts (+0.4%), entertainment and recreation (+0.9%). StatCan (again) attributed the rise in financial investment services to unusual levels of market volatility given geopolitical uncertainties and pending Bank of Canada interest rate announcement at the time. The growth in arts and entertainment output was linked to the NHL playoffs that started in the second half of April.
• Construction was among the handful of sectors that subtracted from growth in April, dropping by 0.4% thanks mostly to lower residential building activities. StatCan pointed out that activity in that sub-sector was almost a quarter lower comparing to its peak level three years ago.
• Bottom line: Today’s GDP report showed widely based gains in output among Canadian industries in April but with that momentum quickly fading in May. Growth in Q2 to-date would still leave output per-capita falling for the seventh quarter out of the last eight. And the economy as it stands is still in excess supply, leaving it room to grow without adding to inflation pressures. That’s why we think the BoC will carry on with cutting interest rates, with 100 basis points of cuts to the overnight rate (including the 25 already done in June) expected this year. Even then, interest rates will still remain at levels high enough to restrict growth in the economy for some time, and we don’t expect per-capita GDP will return to positive territory until Q4 this year.