- LJ Valencia, Economic Analyst, and Randall Bartlett, Senior Director of Canadian Economics
Economic News
Canada: An Upside Surprise to July Real GDP Won’t Derail a 50-basis point Rate Cut in October
September 27, 2024
Highlights
- Canadian real GDP rose by a decent 0.2% in July 2024, following no change from the prior month. The advance was one tick above the consensus of economic forecasters (0.1%) and much better than the Statistics Canada flash estimate published last month (0.0%). Thirteen of 20 subsectors posted increases. See Table 1 for further details.
- The flash estimate suggests no change for real GDP in August (graph 1). Assuming no change for September as well, this implies a 1.0% annualized gain in the third quarter of 2024. But as we’re expecting monthly real GDP growth to pick up in September, our tracking for Q3 is slightly higher at just above 1%. That said, our third quarter estimate remains well below the 2.8% forecast from the Bank of Canada (BoC) published in the July Monetary Policy Report (MPR).
Implications
July 2024’s headline real GDP gain was better-than-expected, and the advance was relatively broad-based. Under the hood, the retail trade sector contributed most to gains in July, driven by growth in retailing activity at new car dealers. Additional support came from finance and insurance, which experienced its second consecutive monthly increase in July--possible proof of some resilience to the effects of higher interest rates. July’s solid advance also comes despite wildfires weighing on sectors like transportation and warehousing and accommodation services.
That said, real GDP gains continue to lag the pace of population growth (graph 2). This week’s population data External link. show that Canadian output per person had fallen in seven of the past eight quarters – a streak not previously seen outside of a recession. In August, job creation fell behind population growth External link. and the unemployment rate moved higher, suggesting more economic slack in the third quarter.
Still, our outlook for GDP shows weaker growth than the BoC’s. Recall that the most recent MPR External link. showed an overly optimistic 2.8% annualized growth for Q3 2024. This was predicated on tailwinds from TMX and a rebound in auto production following an easing due to plant retooling. However, our analysis External link. suggests that economic gains from TMX may be overstated. And the Ward’s motor vehicle production forecast seems to indicate that the Bank’s notion of a rebound in auto production may not materialize in Q3.
In all, a solid headline GDP gain July doesn’t change our call that the BoC will likely proceed with a 50-basis point rate cut in October. Easing inflation External link., ongoing labour market weakness, below trend real GDP gains and more per-person economic weakness provides a strong case for further monetary easing.
