Canada GDP Fades After Rising 0.2% in July — 2nd Update

By Robb M. Stewart

OTTAWA--Signs that Canada's economy stalled again last month has growth this quarter, tracking below the central bank's target and leaves open the possibility of even deeper cuts in interest rates.

Preliminary data suggest industry-level gross domestic product was essentially unchanged in August, Statistics Canada said Friday. That follows a 0.2% expansion in July GDP to 2.234 trillion Canadian dollars, the equivalent of US$1.733 trillion. Compared with a year earlier, GDP in July increased 1.5%.

The recovery in July from a flat economy the month before was led by retail sales and came despite the hit to several industries from wildfires, including those that tore through the Rocky Mountains and Jasper National Park. The resiliency appears to have been short lived, as the data agency pointed to declines last month in manufacturing and transportation, with the economy likely dented by a staged shutdown of freight rail amid labor unrest.

Output by industry has been lackluster since May and the latest readings indicate growth for the quarter is shaping up to be less than half the 2.8% annualized advance forecast by the Bank of Canada for the third quarter. Following rapid population growth in recent years, another soft month also reinforces economist expectations GDP on a per-capita basis will contract for sixth straight quarter.

Economists see a clear case for the central bank to continue cutting rates, building on successive quarter-percentage-point moves at each of the last three policy meetings and with a possibility of a bigger half-point cut from at least one of the two remaining meetings this year.

Central bank officials, who are set to update economic projections with the coming policy meeting in late October, are keen for growth to pick up and absorb some of the excess supply in the economy so that inflation doesn't fall too much and settles close to the 2% target that was reached in August. With unemployment more than a percentage point higher than a year ago, the labor force data for September due in two weeks will be watched for further deterioration and could help set the tone for the bank's meeting.

Bank of Canada Gov. Tiff Macklem this week again said a bigger rate cut is possible if inflation and the economy slow faster than expected, but that decision would continue to hang on incoming data. Markets currently are pricing in a 60% probability of a half-point cut in October, economists say.

"Gov. Macklem has stated that the bank wants growth to pick up and the trend does not seem to be cooperating, clearly raising the odds of more aggressive hikes," said Douglas Porter, chief economist at Bank of Montreal, who estimates third-quarter GDP is tracking annualized growth of 1.3% against a roughly 2% average in the first six months of 2024.

Statistics Canada's advance estimate for August indicates increases in oil and gas extraction were offset by declines in manufacturing and transportation and warehousing. With the threat of a walkout by nearly 10,000 rail workers, Canadian Pacific Kansas City and Canadian National Railway briefly shut down their networks in the country last month, disrupting the movement of goods around Canada and cross-border trade, before the federal government pushed the companies and union into binding arbitration.

GDP projections are prone to revision and Nathan Janzen, assistant chief economist at Royal Bank of Canada, said early data have already introduced downside risk. Incomplete wholesale and manufacturing surveys by Statistics Canada this week indicated sales in both segments fell in August. On the other hand, Bank of Nova Scotia head of capital markets economics Derek Holt said the damping effects of wildfires could reverse from August onward.

For July, the pickup in GDP was stronger than the 0.1% monthly growth economists had expected and Statistics Canada's early projection for a second straight month of flat GDP. Wildfires weighed on transportation and accommodation, but didn't prevent growth in services-producing industries for the month, thanks to the strongest growth in retail trade since January 2023.

Government added to growth, with the public sector increasing for a seventh consecutive month, while utilities expanded for a third straight month and the finance sector recorded a second month in a row of growth. Manufacturing saw a modest increase, partially offset the decline in June, but construction remained weak. Overall, goods-producing industries increased 0.1% for the month.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

September 27, 2024 11:55 ET (15:55 GMT)

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