Canada's GDP Beats Expectations in July, Setting Stage for Potential Interest Rate Cut in October
In a surprising turn of events, Canada's gross domestic product expanded at a faster-than-expected 0.2% rate in July, sparking hopes for a significant interest rate cut next month. However, an advance estimate suggests that growth may have stalled in August, leading economists to predict a lower-than-expected third-quarter GDP.
According to Royce Mendes, head of macro strategy at Desjardins Group, GDP growth for Q3 is tracking at just over 1%, well below the Bank of Canada's initial forecast of 2.8%. This has led analysts to anticipate a 50-basis-point rate cut on October 23.
The growth in July was primarily driven by services-producing industries such as retail trade, public sectors, and finance and insurance, despite the negative impact of wildfires on certain sectors. However, the expected economic weakness in August is likely due to contractions in manufacturing, transportation, and warehousing.
Overall, the Bank of Canada's previous forecast of 2.8% growth in the third quarter now seems unlikely, with economists predicting a figure closer to 1.2%. Olivia Cross, North America economist at Capital Economics, also expects a 50-basis-point rate cut next month.
With the possibility of larger rate cuts on the horizon, the Canadian dollar has weakened against the U.S. dollar, and yields on government bonds have also decreased. BoC Governor Tiff Macklem has indicated that more rate cuts may be necessary to stimulate growth and cool inflation.
In summary, the recent GDP data and forecasts suggest that the Canadian economy is facing challenges, leading to expectations of further interest rate cuts to support growth. This could have implications for borrowing costs, currency exchange rates, and overall economic activity in the coming months.
