On it grows, for now

Confounding the doomsayers in the media yet again, the Canadian economy grew at a 2.1 percent annualized rate in the second quarter of 2023. This was (a) faster than the previous quarter; (b) faster than the Bank of Canada's forecast and (c) the fastest pace of growth since the first quarter of 2023. 

GDP growth in the quarter mainly reflected two factors: higher government consumption spending -- no surprise there -- and a welcome surge in business fixed investment, led by spending on transportation equipment. Household spending, which had been very strong in the first quarter of the year, edged lower in Q2, with spending on durable goods falling while spending on food and services continued to increase. 

The fly in the ointment here continues to be per capita GDP, which fell once again in Q2, its fifth consecutive quarterly decline. Since the growth rates recorded in both Q1 and Q2 are not far from most estimates of the economy's potential growth rate, it seems beyond argument that the per capita weakness is the result of excessive immigration rates rather than any underlying structural issues in the economy.  The Federal government seems to be waking up to this reality, proclaiming its intention to curb immigration in the years ahead, but it remains to be seen whether this will help it at next year's election. 

Monthly GDP data were released alongside the quarterly data, and appear to show that the economy had little to no forward momentum at mid-year. After growing 0.1 percent in May, real GDP was unchanged in June, and StatsCan's preliminary data also suggests a flat result for July. This weak "handoff" suggests that growth for Q3 as a whole will be weaker than for Q2. 

There is nothing in today's data to change the Bank of Canada's policy course, with a further 25 basis point reduction likely to be announced on September 4. Market consensus is now calling for similar reductions at the Bank's two fixed announcement dates in October and December. The near-term outlook for slow growth and tame inflation makes that the likeliest outcome, with the easing cycle set to continue into 2025.