Bank of Canada: it's when, not if

Statistics Canada reported today that Canada's real GDP rose at a 4.5 percent annualized rate in the second quarter of the year, almost a full percentage point higher than the expert consensus.  This was the strongest pace of growth for any single quarter since 2011 and means that the first half of the year has seen the strongest gain since 2002.

The strength in Q2 was broadly based. Household final consumption expenditure built on the strong gains seen in Q1, rising a further 1.1 percent, driven by a 1.9 percent surge in goods purchases. Exports jumped 2.3 percent in volume terms, led by a very strong gain of more than 9 percent in energy sales.  Business investment rose only 0.5 percent in the quarter, but as this came in the wake of a robust 3.1 percent rise in Q1, it is clear that non-residential investment is once again contributing to the overall economy, after several disappointing years.

The sole area of weakness in the data was housing investment, which saw a 1.3 percent decline in the quarter.  This was largely due to technical factors, and it is not yet clear whether the market cooling measures introduced by the Ontario government early in the quarter will have a longer-term dampening effect.

There is little to suggest that the pace of growth will slow significantly any time soon, but a few areas of possible concern can be identified.  The growth in consumer spending is undoubtedly continuing to be fed by rising household indebtedness, and it remains to be seen how this will hold up as the Bank of Canada continues to tighten policy.  Business inventories have been rising strongly; for the moment this accumulation is clearly intentional, but it could produce some overhang in the event that final demand growth begins to slow.  Finally, the impact of Hurricane Harvey may be felt in the latter part of the current quarter and beyond.

Today's data have led money markets to price in better odds -- about 1 in 3 -- of a Bank of Canada rate hike in September.  This can no longer be ruled out.  However, it still seems more likely, given the lack of inflationary pressures, that the Bank will hold off until its October meeting, when it will also issue its updated economic outlook.