Canada: Weak July GDP Suggests High Rates Feel Awful and They Work

A middling print for July real GDP growth was widely expected. Markets didn’t move much following the release as a result. More interesting is what was under the hood. The goods-producing sector dropped sharply, with manufacturing posting the largest monthly drop since April 2021. The BC port strike explains some of this weakness, particularly for chemical manufacturing. The strike also hit transportation and warehousing hard. However, a rebound from wildfires in June provided a tailwind to some sectors, notably accommodation and foods services as well as mining and oil and gas extraction. This tailwind should prove short-lived, however.

Looking ahead, Statistics Canada’s flash estimate for August is pointing to a 0.1% m/m advance. Assuming it is correct, and that September real GDP is flat, Q3 2023 would see a 0.2% annualized increase in real GDP by industry. We’re now tracking annualized growth in real GDP by expenditure of around 0% in the third quarter. This is below the Bank of Canada’s forecast of 1.5% for Q3 real GDP growth published in its July Monetary Policy Report.

Following the annualized 0.2% contraction in real GDP in Q2, which was well below the Bank of Canada’s 1.5% tracking, another below-forecast print for real GDP in Q3 sends the clear signal that the economy is slowing. So, despite inflation sticking above the Bank’s target range, the slowing economy should give the central bank confidence that high interest rates are working, and will continue to do work next year. This should start bringing down inflation more consistently. As such, we remain of the view that the Bank is likely to keep the policy rate on hold at its October meeting, unless the data change meaningful before then.