Canada GDP still motoring along

OK class, please pay attention, because the GDP data released by Statistics Canada this morning are a bit complicated. Real GDP is now estimated to have grown 0.1 percent in March, up from an earlier estimate of zero growth;  the preliminary April estimate of 0.2 percent growth has now been revised down to zero; and the preliminary estimate for May shows a sharp acceleration to 0.4 percent. 

The reason for the gyrations mainly comes down to the lengthy public sector strike that took place in April. That strike led to a 0.3 percent decline in public sector output, the largest such contraction since April 2020. The end of the strike naturally led to a bounce-back in public sector output in May, boosting that month's overall GDP estimate. The best way to look at the two months of data is probably to average the two figures, which yields a 0.2 percent growth rate for both April and May, or an annualized growth rate of about 2.5 percent.  That may not be robust, but it certainly cannot be called a recession, despite what you may read in both mainstream and social media.  

Looking briefly at the sectoral breakdown, it appears that 11 of the 20 sub-sectors tracked by StatsCan posted higher output in April, with the goods-producing sector overall posting 0.1 percent growth. Mining and quarrying posted a fourth straight month of strong growth and construction activity advanced, while manufacturing output fell 0.6 percent, its first decline in four months. The preliminary data for May suggest a rebound in manufacturing and, as already noted, public sector output, partially offset by lower mining and quarrying output. 

We now have on hand most of the data that the Bank of Canada will be weighing up when it makes its next interest rate decision on July 12.  In terms of inflation, the May data were encouraging at the headline level -- up 3.4 percent from a year ago -- but the Bank was expecting this and no doubt still believes it will be hard to get inflation all the way down to the 2 percent target. Today's growth figures are more or less in line with most estimates of the economy's potential growth rate, but that does little to allay the Bank's oft-stated concerns about the lack of slack in the economy.

The one important data series that will be updated before rate decision day is the labour force survey: data for June will be published on July 7.  With the unemployment rate already near historic lows and wage gains finally outpacing inflation, it is likely to take a very weak report to convince the Bank that its policy  tightening can be paused again.  Markets are only pricing in about a 50 percent chance of another rate hike, but looking objectively at theh data, the likelihood seems higher than that.