On the face of it, Canada’s second-quarter GDP report looked good today at 2.1% annualized compared to 1.6% expected, and easily beating the Bank of Canada’s forecast of 1.5%.
But the problem here is that the composition of growth was all wrong. Consumer spending rose at a mere 0.6% annual rate, while government consumption rose at a 6.7% annual rate, contributing 1.3 percentage points to GDP.
Business investment was positive, rising at an annual rate of 11.1%, but if we strip that rate away, aircraft and transportation were the main drivers of gains. These are notoriously volatile components and do not reflect underlying economic investment. At the same time, interest rates are falling, with residential investment down at an annual rate of 7.3%, which is no doubt exacerbated by rising interest rates.
The monthly numbers are likely to tell the story that could worry the Bank of Canada. GDP was flat in June and the preliminary report for July was also flat. Both point to a deteriorating growth trajectory, and so far interest rate cuts have done little to boost activity in the housing sector.
At the sector level, manufacturing, construction and wholesale were the most negative growth sectors in June, while utilities were the most contributor to growth: again a weak signal.
The market is now pricing in a 20% chance of a 50 basis point rate cut on Wednesday. The Bank of Canada isn’t afraid to surprise, so don’t rule out a quicker move. Either way, expect a 25 basis point rate cut at each meeting between now and next year.