MNI:Canada GDP Less Than Forecast +3.3% in Q2, Shrinks in July

Canada's GDP grew at a less-than-expected 3.3% annualized second-quarter pace and a flash estimate for July showed the first contraction in six months, weakness that may erase bets the central bank will bring another 100bp rate hike next week.

Statistics Canada said Wednesday preliminary evidence points to 0.1% contraction in July, while the official figure for June showed a 0.1% expansion. The June gain matched economist forecasts while the Q2 figure lagged the expected 4.5% increase.

Consumer spending on clothing, autos and travel as the economy re-opened along with a major boost in business inventories led second-quarter growth. Statistics Canada also said the July setback came from factories, wholesaling and retailing. 

The Bank of Canada said last month it must keep raising interest rates to pull demand back in line with supply and bring the fastest inflation in four decades back to its 2% target before high price expectations become embedded. Economists before the GDP report were split on whether the Sept. 7 meeting would bring a hike of 50bps or 75bps, and some former officials have told MNI another 100 remains possible.

Other reports have also signaled the economy is slowing, with inflation fading to 7.6% from 8.1% and payrolls contracting in the latest figures. Still, economists see less risk of a recession in Canada this year than the rest of the G7 or China, in part because commodity exporters gain a windfall from the run-up in prices. BOC Governor Tiff Macklem took the rare step of publishing an opinion piece within hours of the latest inflation figure, saying “we know our job is not done yet -- it won’t be done until inflation gets back to the two per cent target.”

That inflation challenge is clear in the GDP report, with economy-wide prices rising the fastest since 1974 at 3.3%. The second quarter expansion is also still somewhat close to the BOC's prediction of 3%, and policymakers have already said they see growth slowing to 2% in the third quarter. 

Consumers have less of their Covid relief checks to spend in the future, with most support programs ending in Q2 and the savings rate declining to 6.2% from 9.5%. That's still greater than the pre-pandemic level of 2.7%. Another drag on future growth is business inventories-- they climbed CAD47 billion in Q2 including the biggest jump in farm products in data back to 1961, an advance unlikely to be repeated.

Monthly GDP figures also confirmed the BOC's hikes so far this year from 0.25% to 2.5% are already hitting the housing market, which shrank a fourth straight time in June. Some of that decline will likely be welcomed by officials who warned for years about over-extended borrowers and frothy price gains.