Canada: Headline GDP Gains Continue, but So Does Per Capita Weakness

May 2024’s headline GDP gain was better-than-expected and advances were relatively broad-based. The manufacturing sector also grew for the second consecutive month, offsetting some of its early-year weakness. Additional support came from finance and insurance—which continue to prove resilient to the effects of higher interest rates—and new transportation capacity as the Trans Mountain pipeline expansion (TMX) came online. 

That said, real GDP gains continue to lag the pace of population growth (graph 2). In June, we highlighted that Canadian output per person had fallen in six of the past seven quarters External link.—a streak not previously seen outside of a recession. Today’s data suggest it will be seven out of eight once the Q2 GDP by expenditure and population data are released in the months ahead. Given that job creation is being far outpaced by headcount gains External link., all signs suggest economic slack continued to increase in the second quarter.

Our outlook for GDP remains less optimistic than the BoC’s, in large part because of differences in the forecast trajectory for population growth. In our view, the balance of risks tilts more towards weaker growth and more motivation for the Bank to cut rates. Recall that the July 2024 MPR External link. penciled in an optimistic 2.8% annualized expansion for Q3 2024. That reflected still-strong headcount gains driving consumer and housing demand, with additional support from strong exports via increased pipeline capacity from TMX. In contrast, our forecast incorporates recent softness in the labour market and other key indicators such as retail sales and wholesale trade. We also assume population growth will slow meaningfully External link. over the coming quarters as Ottawa’s planned temporary resident cuts take effect.

In all, solid headline GDP gains don’t change our call that the BoC will cut its policy rate again in September. Following ongoing labour market softness, the continued easing of price pressures and increasingly dovish language in last week’s MPR, more per-person economic weakness adds to the case for additional monetary easing.