Canada’s economy showed a surprising uptick in growth during the second quarter of 2024, but the overall outlook remains cautiously optimistic as the Bank of Canada (BoC) prepares for another potential interest rate cut.
On Friday, Statistics Canada reported that the annualized growth for the second quarter came in at 2.1%. This figure surpassed both the 1.6% anticipated by market analysts and the Bank of Canada’s own forecast of 1.5%.
The better-than-expected growth was bolstered by increased government expenditure, higher business investments, and a rise in consumer spending on services.
Challenges Ahead: Stagnation and Rate Cut Predictions
Despite the robust growth figure for the second quarter, signs of economic weakness are emerging. June’s economic performance was flat, and preliminary estimates suggest there was no growth in July. This stagnation highlights underlying issues that are likely to influence the BoC’s monetary policy decisions.
“Weak momentum heading into the third quarter gives ample reason for the BoC to continue cutting interest rates,” said Andrew Grantham, senior economist at CIBC Capital Markets.
The GDP data is the last major economic report before the BoC’s upcoming monetary policy decision, and it is widely expected that the central bank will cut its benchmark rate for the third time in a row on September 4.
Market Expectations and Economic Indicators
Financial markets have increased their expectations for a rate cut, now predicting an 80% chance of a 25 basis point reduction, up from 77% before the data release. Beyond the immediate cut, markets forecast two additional rate reductions later in the year.
Doug Porter, chief economist at BMO Capital Markets, described the GDP report as “roughly neutral” from the BoC’s perspective.
He noted that while the data does not drastically alter the broader economic picture, the ongoing challenges underscore the need for continued monetary easing.
Sectoral Contributions and Per Capita Performance
The second quarter’s growth was driven primarily by increased government spending, which rose by 1.5% due to higher wages, and a notable 6.5% surge in business investment in machinery and equipment.
However, on a per capita basis, GDP continued to contract for the fifth consecutive quarter, reflecting persistent economic strain on individual Canadians.
The Canadian dollar saw a slight increase, rising 0.1% to C$1.3467 against the U.S. dollar, or 74.26 U.S. cents, following the release of the data. Additionally, the growth rate for the first quarter was revised upward to 1.8% from the previously reported 1.7%.
Looking Ahead
Most economic indicators point to a slowing economy, with rising unemployment and a wave of mortgage renewals expected to exert additional pressure on the central bank.
In July, BoC Governor Tiff Macklem hinted at a shift in focus towards stimulating the economy rather than merely controlling inflation, signaling a change in strategy in response to weakening economic conditions.
The Bank of Canada has already reduced its benchmark rate twice since June, bringing it down to 4.5%. As the central bank navigates these challenges, its forthcoming decisions will be crucial in shaping the economic landscape for the remainder of the year.
