Canada: August Real GDP was Unchanged, and So Is Our Rate Call

August 2024’s stalling in headline real GDP reflected both trend and one-off factors impacting the Canadian economy. Under the hood, the economy saw gains in the retail trade, public administration and resource extraction sectors. Additional support came from finance and insurance, which experienced its third consecutive monthly increase in August. However, the economy also saw contractions in key sectors such as wholesale trade, utilities and manufacturing, which contributed most of the declines. In manufacturing, this was partly due to retooling and maintenance activities at motor vehicle plants. Additional declines came from transportation and warehousing due to labour strikes at Canada’s two main rail carriers. Some of this can be expected to unwind in September and possibly beyond.

In September, the strong advance in housing starts and home sales External link. point to signs of an economic tailwind. Headline job numbers also increased External link., but it wasn’t enough to keep up with the current population trend, suggesting the persistence of slack in the third quarter. Indeed, real GDP continues to lag the pace of population growth (graph 2).  

Still, our latest outlook for real GDP shows growth below the Bank of Canada’s (BoC’s) Q3 projection in the October Monetary Policy Report (MPR). Recall that last week, the BoC announced a 50-basis point rate cut and the MPR outlook External link. for Q3 real GDP changed from an overly optimistic 2.8% annualized growth to 1.5%. This reversal was motivated by weaker business investment and government spending. Moreover, the BoC anticipates some export growth as the increase in energy exports via the TMX pipeline are partly offset by a slowdown in motor vehicle parts exports. Our analysis External link. suggests that it will take time for crude oil exports and production to increase as a result of the TMX, but that it may start to show up more noticeably in the final quarter of 2024. And when combined with an expected rebound in auto production in Q4, we believe there may be some upside risk to the BoC’s real GDP growth forecast of 2.0% in the fourth quarter.

Lower inflation External link., ongoing labour market weakness, below trend real GDP gains and more per-person economic weakness provides a strong case for continued monetary easing. But near-term real GDP growth in the second half of 2024 tracking close to the BoC’s forecast reinforces our expectation for a 25-basis point rate cut in December. We would need to see a more meaningful deterioration in economic conditions relative to the Bank’s forecast to change that view.