MNI: Canada GDP Grows In April And May After Q1 Disappointment

Canada's GDP showed early momentum in the second quarter in line with the central bank's view when it cut borrowing costs this month that the economy can pick up alongside inflation moving back towards target this year.

Output increased 0.3% in April according to Statistics Canada's report Friday from Ottawa, in line with the economist consensus and the fastest gain since January. Fifteen of 20 industries showed gains including an 8% advance in motor vehicle and parts wholesaling that was the largest since October 2021 and a 1.8% rise in energy and mining. 

The agency's flash estimate for May showed a 0.1% rise with increases in manufacturing, real estate and finance curbed by decreases in retail and wholesale trade. Even with that slowdown, two positive monthly GDP reports are often enough to keep quarterly GDP advancing. Some economists have told MNI that only some kind of economic slump would push the BOC to a series of rapid rate cuts.

The Bank’s June 5 rate decision said excess supply built up after its previous 10 rate hikes provides room for the economy to pick up even as inflation slows. Governor Tiff Macklem has also said cutting borrowing costs too fast risks hard-won progress slowing inflation. The Bank’s April forecast showed GDP growth picking up this year and next, from 1.1% last year to 1.5% this year and 2.2% in 2025. 

Canada's Q1 GDP grew a less-than-expected 1.7% annualized and Q4 was marked down to show output stalled, part of the reason Macklem led G7 central banks with a quarter-point cut. Of course, the main reason for moving was evidence of a broader cooling of trend inflation, and Friday's report doesn't provide as much detail on that front. There are also reports on jobs and CPI due before next rate meeting on July 24. 

Monthly data across April and May suggested modest growth and signs monetary policy remains restrictive. For example, interest-rate sensitive construction and real estate were the two biggest weak points in the April industry data. StatsCan said housing and renovation activity was 24% below a peak set three years ago. 

Figuring out slack in the economy has been complicated by record immigration that the government has recently moved to slow. 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 signs of strain including a rising jobless rate and households facing painful mortgage re-financings after the Bank hiked rates to the highest since 2001.