MNI: Canada Flash Q2 GDP +2.2%, Faster Than BOC Rebound Call

Canada's economy grew at a 2.2% annualized second-quarter pace according to a flash estimate, faster than the central bank estimated but in line with officials' view there's scope to keep cutting interest rates because slack in the economy allows for faster growth while inflation settles back on target over the next year.

Statistics Canada on Wednesday also provided a flash estimate that GDP grew 0.1% in June led by construction. Its official figure for May was a 0.2% increase led by manufacturing and a fifth straight gain in the public sector boosted by the return of educators in Quebec following a labor strike. The May increase was stronger than the market consensus for a 0.1% improvement. 

Second-quarter growth comes in ahead of the Bank of Canada's estimate for a 1.5% expansion, and officials predict further pickup to 2.8% growth in the third quarter. Governor Tiff Macklem cut his key rate last week for a second meeting and said inflation will return to target sometime next year. He also said inflation risks have become more balanced and more growth is needed with some risks of undershooting the target. 

Growth was broad-based in May with expansion across 15 of 20 industries. Manufacturing grew 1.0%, the most since January of last year. While overall goods production rose 0.4% several categories reported big swings linked to maintenance or retooling work. The opening of the Trans Mountain pipeline didn’t provide the major boost to overall GDP that some experts had anticipated.

There was some evidence the Bank of Canada's earlier cycle of 10 rate hikes was cooling demand, with retail and wholesale sales accounting for the biggest drags on GDP in May. While Canada's GDP grew by a modest 1.1% over the last year, May marked the fourth time in five months the economy expanded.

The quarterly GDP estimate from this report is based on production by industry, which isn't the same as the official expenditure-based measure StatsCan will provide on Aug. 30. 

Figuring out slack in the economy has been complicated by record immigration and many private economists have pointed to a long spell of falling per capita GDP as evidence lower interest rates are justified. The economy faces other strains including a rising jobless rate and households facing painful mortgage refinancings after the Bank’s earlier 10 interest-rate hikes.