A turning point?

First the good news: Canada's real GDP rose at a 3.3 percent annualized rate (0.8 percent quarter to quarter) in Q2, according to data from Statistics Canada this morning. This marks the fourth consecutive quarter of real growth and stands in marked contrast to the US, where real GDP declined in both Q1 and Q2. Much of the growth resulted from business inventory accumulation, which may prove a mixed blessing if we are in fact about to see a shift to slower growth or even recession. Both housing investment and durable goods spending fell in the quarter, which may well indicate that higher interest rates are already having an impact. 

Given mounting concerns over the possibility of a pause in growth,  monthly GDP data are arguably more informative at present than the quarterly figures.  Here, the data also published today by StatsCan provide a mixed picture. Real GDP rose 0.1 percent in June after rising only minimally in May.  (It is worth noting that the May data originally showed a 0.1 percent decline, which immediately led the media to start proclaiming a recession).  Growth in June was reasonably broad-based, with fourteen of the twenty industrial sub-sectors showing gains. The accommodation and food services sector was particularly strong as border restrictions continued to ease. 

Advance data for July seem to tell a different story. StatsCan estimates that GDP fell 0.1 percent in the month, with manufacturing, wholesale and retail trade and utilities all posting declines. If final data (due on September 29) confirm this, it will imply that GDP is essentially unchanged from April, which was the last month to post really solid gains. This does not meet any sensible definition of a recession, but it does suggest that the economy has moved from the post-COVID recovery phase to a much lower growth path. 

Such a slowdown is, of course, what the Bank of Canada is trying to achieve, given its clear concerns about overheating in the economy, particularly in the labour market. Today's data are among the last major indicators the Bank will see before its next rate decision, due on September 7: the all-important employment and CPI data for August will not be published until later in the month, though it is likely that the Bank will have advance knowledge of the jobs data when it meets to make its rate decision. After the outsized rate hikes at the last two meetings, expect the Governing Council to settle for a more modest 50 basis point hike this time.