Canada’s Growth Surpasses Expectations, Rate Cuts Still Anticipated: Reuters

By Promit Mukherjee

OTTAWA – Canada’s economy experienced stronger-than-anticipated growth in the second quarter, according to data released on Friday. Despite this positive indicator, analysts suggest that the central bank remains poised to implement a third consecutive rate cut next week.

Data from Statistics Canada revealed that the annualized growth for the second quarter was 2.1%, surpassing market expectations of 1.6% and the Bank of Canada’s (BoC) forecast of 1.5%. However, a sign of potential weakness ahead is evident, as growth in June was stagnant, and preliminary estimates indicated zero growth for July.

"Declining momentum as we enter the third quarter provides sufficient justification for the BoC to persist with interest rate reductions," stated Andrew Grantham, a senior economist at CIBC Capital Markets.

The GDP figures represent the final economic data set ahead of the Bank of Canada’s monetary policy decision, where a rate cut is widely anticipated for the third time in a row.

Financial markets are now estimating an 80% likelihood of a 25 basis point rate cut on September 4, up from 77% prior to the data release. Moreover, projections are in place for two additional rate cuts later this year.

From the BoC’s viewpoint, this report is neutral and does not alter the broader economic picture, according to Doug Porter, chief economist at BMO Capital Markets.

The second quarter growth was primarily driven by government spending, an uptick in business investments, and increased consumer spending on services. Nevertheless, on a per capita basis, GDP has contracted for five consecutive quarters.

The Canadian dollar saw a slight increase, rising 0.1% to C$1.3467 against the U.S. dollar, which is equivalent to 74.26 U.S. cents. The economic growth figure for the first quarter was revised to 1.8% from a previously reported 1.7%.

Most economic indicators point to a loss of momentum in the economy attributed to high interest rates, heightening expectations for a rate cut. Rising unemployment and impending mortgage renewals next year are adding more pressure on the central bank to reduce its policy rate.

During a monetary policy announcement in July, BoC Governor Tiff Macklem hinted at a shift towards promoting economic growth rather than solely focusing on curbing inflation, reflecting growing concerns over an increasingly weak economy. The Bank has already reduced its benchmark rate twice since June, bringing it down to 4.5%.

The quarterly economic increase was mainly attributed to a 1.5% rise in government expenditure driven by higher wages and a substantial 6.5% surge in business investment in machinery and equipment. However, June’s stagnant performance followed a mere 0.1% growth in May and was primarily influenced by the most significant contraction in goods-producing industries since December 2023, as reported by Statistics Canada.