OTTAWA – Canada’s economy showed signs of a modest recovery in August, although it fell short of the central bank’s expectations for the quarter. Despite this, experts believe that the central bank will maintain its current interest rates due to stubborn inflation.
Preliminary data suggests that the economy experienced slight growth in August, marking a slight improvement from the previous month when activity was hindered by supply disruptions and rising borrowing costs.
According to Statistics Canada, the country’s Gross Domestic Product (GDP), which measures the total value of goods and services produced, remained essentially unchanged in July at 2.082 trillion Canadian dollars ($1.544 trillion). Compared to the previous year, GDP increased by 1.1%.
The pace of industry-level activity matched the data agency’s estimate for July but fell below economists’ expectations of 0.1% growth. This follows a 0.2% decline in June.
Early indications show that GDP in August increased marginally by 0.1%. However, these figures are expected to be updated once the official data is released next month. The agency noted that growth in wholesale trade and the finance and insurance sectors were partly offset by declines in retail trade and the oil and gas extraction sectors.
Economists predict that if growth remains subdued in September, the economy is headed for less than 0.5% growth on an annualized basis in the third quarter. This projection is significantly below the Bank of Canada’s forecast of 1.5% growth in its latest monetary policy report, especially following a surprise 0.2% contraction in the second quarter.
The recent fluctuations in monthly GDP reflect challenges faced by industries due to forest fires across Canada, which impacted various sectors and affected the transportation of goods through ports on the west coast. However, experts believe that the economy’s continued weak performance indicates that past interest rate hikes have successfully curbed excessive demand.
While Canada’s economy has shown modest signs of recovery, it still lags behind the central bank’s expectations for the quarter. The possibility of subdued growth in the upcoming months suggests that the Bank of Canada will maintain its current interest rates to counter stubborn inflation.
Economic Challenges in Canada
The Bank of Canada has decided to maintain its policy rate at a record high of 5% for this month, following two consecutive quarter-point increases in June and July. As the effects of these rate hikes gradually affect the economy, the central bank expects a slowdown in GDP growth, which will likely impact both household spending and business investment. However, the bank remains vigilant and is willing to raise rates further if core inflation stays stubbornly high. Surprisingly, headline consumer-price inflation accelerated in August.
Struggling Growth in Canada
Senior economist Robert Kavcic from BMO Economics notes that Canada is facing significant challenges in terms of its growth. Despite little change in real GDP over the past six months, the pace of population growth in Canada makes the situation even more concerning. Nonetheless, economists believe that the central bank can find solace in the fact that their high interest rates are effective in combating inflation. This should give policymakers the confidence to keep interest rates stable during their next meeting in late October.
Mixed Performance Across Industries
Statistics Canada’s GDP report reveals a mixed performance across industries. While services industries experienced slight growth overall, output from goods-producing industries contracted in July.
The manufacturing sector, specifically, has witnessed contraction for the second consecutive month, with its most significant decline since April 2021. The decrease is primarily attributed to a lower build-up of inventories. Non-durable manufacturing has weakened for three straight months, partly due to disruptions caused by a port strike in British Columbia, especially in chemical manufacturing. Durable manufacturing has experienced a decline for the fourth time in five months.
Positive Recovery and Expansion
Despite these challenges, some industries affected by wildfires in June have shown signs of recovery. Mining has successfully offset the previous month’s decline, while accommodation and food services also experienced growth in July. Additionally, oil and gas extraction increased for the sixth time in the last seven months, primarily due to a ramp-up in natural gas output following a contraction caused by recent wildfires.
In conclusion, Canada’s economy faces significant obstacles to growth. The Bank of Canada’s decision to maintain high interest rates reflects their confidence in curbing inflation. However, the overall slowdown in the economy should give policymakers the necessary comfort to maintain stable interest rates in the upcoming meeting.