Economy hit ‘sharp reversal’ in June. What this means for the Bank of Canada

Click to play video: 'Economy grew in May, slowed in June: StatCan'
Economy grew in May, slowed in June: StatCan
WATCH - Economy grew in May, slowed in June: StatCan – Jul 28, 2023

Canada’s economy kept growing in May, but early signs of a long-awaited slowdown started to appear in June, according to Statistics Canada.

The federal agency said Friday that real gross domestic product was up 0.3 per cent in May, with growth in services-producing sectors offsetting declines in goods.

A return to work among striking federal service workers helped lift GDP in May, StatCan said. An easing in supply chain kinks, especially among semiconductors, boosted automotive manufacturing in the month.

Rebounding housing markets in some of Canada’s largest cities drove real estate activity up 7.6 per cent, StatCan said. Construction activity contracted 0.8 per cent, however, amid a slowdown in residential building and renovations.

Click to play video: 'Upsizing buyers drove demand in Canada’s housing market this spring, new report says'
Upsizing buyers drove demand in Canada’s housing market this spring, new report says

Forest fires in Alberta dragged down growth in the mining, quarrying and oil and gas extraction industries in May, according to the agency.

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The energy sector was “severely impacted” by forest fires, StatCan said, contracting 2.1 per cent in May — the largest decline in the industry since August 2020.

The month’s GDP figures are down slightly from StatCan’s flash estimates suggesting growth of 0.4 per cent in the month. April’s reading showed the economy was virtually unchanged, while it grew a slight 0.1 per cent in March.

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Early readings for June show the economy contracted 0.2 per cent in June, though those figures could be revised.

Those same early estimates from StatCan show economy grew at a rate of 1.0 per cent annualized in the second quarter of the year. In its most recent monetary policy report released in July, the Bank of Canada said it expected growth of 1.5 per cent, revised up from earlier expectations of 1.0 per cent.

Click to play video: 'Bank of Canada raises key interest rate to 5 per cent, highest level in 22 years'
Bank of Canada raises key interest rate to 5 per cent, highest level in 22 years

What does a slowing economy mean for the Bank of Canada?

The central bank has been working to slow the economy by raising interest rates in an effort to bring inflation to its target of two per cent.

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It most recently raised its key rate on July 12 by a quarter of a percentage point to five per cent, the highest it’s been since 2001.

The Bank of Canada has said that future rate decisions, including its next one on Sept. 6, will be dependent on what economic data shows.

Click to play video: 'Raising interest rate to 5 per cent will help relieve inflation: Macklem'
Raising interest rate to 5 per cent will help relieve inflation: Macklem

“The sharp reversal in June reinforces our view that the Bank of Canada is done with rate hikes,” Royce Mendes, head of macro strategy at Desjardins Group, said in a note on Friday. “Momentum is clearly slowing and the risks to the downside are growing.”

TD Bank economist Marc Ercolao said in a note that with the public sector strike and wildfire impacts, Canada’s economy has been hit by a “series of transitory shocks” that make the data difficult to interpret.

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While he expects one-time disruptions in the data to continue with the impact of the B.C. port strike and the federal government’s grocery rebate rolling out in July, Ercolao said there’s enough in the latest GDP figures to suggest there was some “slowing momentum” in the economy heading into the summer months.

As such, Ercolao said the Bank of Canada should be satisfied with the progress in slowing the economy to date enough to hold interest rates steady in September.

GDP is not the only metric the central bank will be watching as it plots its next rate decision, however.

CIBC senior economist Andrew Grantham said in a note that he believes forthcoming updates on core inflation and next week’s Labour Force Survey for July will be “more important” to the Bank of Canada in gauging whether demand in the economy has cooled sufficiently to leave rates unchanged.

— with files from Reuters, The Canadian Press

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