October 10, 2024
The 0.2% increase in GDP in July was stronger than the “essentially unchanged” advance estimate a month ago, but still leaves growth in Q3 as a whole tracking below the BoC’s 2.8% forecast in July, and down on a per-capita basis for a sixth consecutive quarter.
The increase in July output was despite some negative impact from wildfires that will reverse in coming months. But the early estimate for August output was still ‘essentially unchanged.’ Those early estimates have been exceptionally revision prone, and early reports on wholesale and manufacturing sales for August are pointing to some early downside risk.
For Q3 GDP growth as a whole, the monthly GDP numbers are still tracking broadly in line with our own 1.0% (annualized) assumption – still below the pace of population growth and implying yet another decline on a per-capita basis.
Details behind the July GDP increase were mixed – growth in direct government administration has accounted for roughly a quarter of GDP growth over the last three months (by our count), with a third consecutive 0.4% increase in public administration in August propping up services output growth.
Retail trade also expanded by a full percentage point but output in accommodation & food services was little changed (+0.1%), broadly in line with our own tracking of card transactions.
Manufacturing output edged up by 0.3%, retracing little of a 1.3% pullback in June. And construction spending fell by 0.4%
Bottom line: Slowing inflation has allowed the BoC to shift focus to downside economic growth risks – with Governor Macklem reiterating after cutting the overnight rate earlier this month the need to ” increasingly guard against the risk that the economy is too weak and inflation falls too much.” Even with a tick higher in July, GDP is tracking another per-capita decline in Q3 and below the BoC’s prior forecast. The unemployment rate has continued to drift higher and inflation lower. The case for additional interest rate cuts against that backdrop is clear – we continue to expect further gradual interest rate reductions (at a 25 basis point per meeting pace) down towards a 3% overnight rate with risks tilted to larger/faster cuts should the economy deteriorate significantly further.
