Canada’s economy now “struggling” under the weight of high interest rates

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Canada’s economic activity in July was unchanged from the previous month, marking the second straight month of weak GDP results.

The flat reading is well below the Bank of Canada’s earlier forecast of 1.5% growth in the month, and follows a 0.2% contraction in June.

The slowdown was led by the manufacturing sector, which saw a 1.5% month-over-month decline in July.

“While some disruptions have compromised the ‘cleanliness’ of recent GDP data, the bigger picture is that Canada is really struggling to grow right now,” noted BMO senior economist Robert Kavcic. “Real GDP is little changed over the past six months, which looks even weaker when considering that the population is exploding at a 3% per-year run rate.”

Sectors that helped propel overall growth included tourism-related industries, (+2.3%), along with mining and quarrying (+4.2%), which have bounced back following slowdowns due to wildfires.

While overall real estate and rental-related sectors were up 0.1% in July, activities related to real estate (including real estate agents and brokers), contracted 1.3%, its first decline in six months.

“Interest rate hikes in both June and July may have deterred some buyers in the month,” StatCan noted. “Despite increasing activity in the majority of markets in July, declines in the Greater Toronto Area along with the Fraser Valley more than offset those increases.”

Activity at the offices of real estate agents and brokers

Looking ahead to August’s GDP data, Statistics Canada’s flash estimate is for a modest 0.1% growth rate, led by increases in wholesale trade and the finance and insurance sectors.

Economists see additional Bank of Canada rate hike as unlikely

Most economists continue to expect the Bank of Canada to leave its benchmark rate unchanged at its next monetary policy meeting on October 26, and the latest GDP results have reinforced those expectations.

“Despite inflation sticking above the Bank’s target range, the slowing economy should give the central bank confidence that high interest rates are working, and will continue to do work next year,” wrote Randall Bartlett, senior director of Canadian Economics at Desjardins.

“This should start bringing down inflation more consistently,” he added. “As such, we remain of the view that the Bank is likely to keep the policy rate on hold at its October meeting, unless the data change meaningful before then.”

TD Economics’ latest forecast also has the Bank leaving rates unchanged for the remainder of the year.

“Slow progress on inflation over the next several months will keep the Bank of Canada’s hand hovering over the rate-hike button, but with soft economic growth and rising unemployment, it is unlikely they will need to press it,” it noted.

But Scotiabank’s Derek Holt is taking a more contrarian stance, noting that GDP data is the “least significant release” leading up to the Bank’s October rate decision.

“The BoC targets inflation, of course, and not GDP,” he wrote. And with the BoC’s preferred core inflation readings landing at 5.4% on a seasonally adjusted monthly basis, Holt says more important will be the September inflation data scheduled for release on October 17, just prior to the Bank’s next rate meeting.

“On balance, while we need to be cautious in both directions with respect to reading the GDP tea leaves, I continue to believe that the drivers of inflation combined with elevated inflation expectations put the BoC behind the fight,” he added. “We have seen periods of time in our country’s history when the BoC tightened and maintained a tight stance even as GDP [contracted].”

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