Canada’s economy grew in May but likely contracted in June.
Canada's economy grew in May but likely contracted in June.
Canada’s Economic Growth Slows Down, Raising Questions on Monetary Policy
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Canada’s economy showed signs of 0.3% growth in May, but it is expected to have contracted in June, pointing toward a potential slowdown that could impact the central bank’s monetary tightening campaign, which has pushed interest rates to a 22-year high.
According to Statistics Canada, the expansion in May was consistent with expectations. However, the flash estimate for June indicates a likely 0.2% decline in Gross Domestic Product (GDP). This suggests a lower-than-anticipated 1% annualized GDP rate for the second quarter. The Bank of Canada (BoC) had projected a 1.5% annualized GDP gain for that three-month period.
The revised numbers for April show a 0.1% increase in GDP, previously reported as a flat reading. Despite this, economists are concerned about the recent decline, which reinforces their belief that the Bank of Canada may have concluded its rate hikes.
“The sharp reversal in June reinforces our view that the Bank of Canada is done with rate hikes,” notes Royce Mendes, head of macro strategy at Desjardins Group. “Momentum is clearly slowing, and the risks to the downside are growing.”
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Earlier this month, the BoC raised the key overnight rate by a quarter of a percentage point to 5.0%, its 10th increase in 16 months. The central bank warned that it could raise rates further to lower inflation to its 2% target. Alongside the rate hikes, the BoC also increased its growth forecast for this year, citing pent-up demand for services and a tight labor market as factors contributing to the economy’s excess demand.
However, economists like Doug Porter, chief economist at BMO Capital Markets, highlight that the bigger picture reveals a struggle for growth to remain positively consistent throughout the second half of the year. They anticipate more back-and-forth months like May and June, resulting in sluggish overall growth.
The growth in May was driven by a rebound in wholesale trade, public administration, manufacturing, and real estate sectors, according to Statscan. These gains helped offset the largest decline in the energy sector since August 2020. Wildfires in Alberta, the country’s primary oil-producing province, contributed to the reduced growth in the energy sector, marking the first decline in five months. Statscan reports that oil and gas extraction, excluding oil sands, experienced a significant 6.6% drop due to the forest fires.
The service-producing sectors of Canada’s economy saw a 0.5% expansion in May, while the goods-producing sectors experienced a 0.3% contraction.
Overall, the recent data signals a potential slowdown in Canada’s economy and raises doubts about the sustainability of the BoC’s monetary tightening campaign. While the Bank of Canada had been actively raising rates and projecting growth, the decline in June’s GDP could prompt a shift in their approach. Economists believe that slower growth and increased risks to the downside may influence the central bank’s decision to halt rate hikes for the time being.
The next few quarters will be critical for Canada’s economic trajectory, and policymakers will closely monitor the data to determine the appropriate monetary policy needed to sustain growth and manage potential risks.
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