Canada’s economy ‘remains in a growth funk.’ Will that affect rate cut hopes?

The Canadian economy managed to eke out growth despite the impact of raging wildfires in July, Statistics Canada said Friday, but early estimates for August were less rosy.
Canada’s real gross domestic product was up 0.2 per cent in July, StatCan said, a notch above economists’ expectations. That boost was owed largely to services-producing industries in the month, including the public sector.
Retail trade posted the largest jump in July, with a full percentage point of growth marking the largest gain in the sector since January 2023. Gains in activity at motor vehicles and parts dealers in the month more than offset declines in June when a technical glitch disrupted sales at dealerships.
Wildfires were impacting several industries in July, however, with warehousing and transportation seeing its second consecutive monthly contraction. Some rail transportation was forced to shutdown at the end of the month amid wildfires through Jasper National Park and the Rocky Mountains, the agency noted.
Wildfires also shuttered iron ore mines in parts of Labrador and Northern Quebec, and disrupted the summer tourist season in Western Canada.
Looking ahead to August, StatCan said it projected real GDP was essentially unchanged in the month thanks to more declines in manufacturing, transportation and warehousing. Early estimates for August will be revised at the end of October.
“It does suggest that the economy is growing at a relatively subdued pace as we worked our way through the summer months,” Dawn Desjardins, chief economist at Deloitte Canada, told Global News on Friday.
The latest figures for August and July come after Statistics Canada reported the economy grew 2.1 per cent on an annualized basis in the second quarter.
The Bank of Canada’s latest forecasts call for annualized growth of 2.8 per cent in the third quarter, but economists and the central bank itself have recently warned that actual output in the period may end up softer than first expected.
BMO chief economist Doug Porter said in a note to clients Friday morning that the latest GDP figures have Canada on track for annualized growth of 1.3 per cent this quarter, well below the central bank’s estimates. The country’s economy “remains in a growth funk,” he said.
Deloitte Canada is also expecting weaker growth than first anticipated in the second half of 2024, according to a revised economic outlook released Thursday. Desjardins pointed to subdued consumer spending as weighing on the economy, with growth only expected to return in the latter half of 2025.
“That really reflects the fact that we think inflation will be under control, and the Bank of Canada will get interest rates quite a bit lower than they are today,” she said.
Concerns among decisionmakers at the Bank of Canada have shifted in recent months amid signs inflation is back under control. Recent communications from the central bank have highlighted fears that inflation drops too far below the two per cent target, should the economy and labour market continue to weaken.
Three interest rate cuts into its easing cycle, the Bank of Canada is looking for growth to pick up by lowering borrowing rates.
Economists are divided on what the July GDP result means for the pace of cuts to expect from the Bank of Canada.
Porter said that the latest data shows an ongoing weakening trend in Canada’s economy, which is “clearly raising the odds of more aggressive hikes—i.e., 50 bps in October.”
While the U.S. Federal Reserve kicked off its own rate-cut cycle with an oversized half-point step earlier this month, TD Bank economist Marc Ercolao said in a note that he doesn’t see the July GDP figures significantly tilting the Bank of Canada’s scales one way or another towards 25 or 50 basis points in October.
“More emphasis will be placed on upcoming labour market data as well as inflation data, where the Bank will be looking for signs that price growth can remain durably at (two per cent),” he wrote.
While CIBC is expecting the Bank of Canada will deliver a pair of 50-basis-point cuts in the months ahead, Katherine Judge, director of economics, said Friday that her call remains for a quarter-point drop in October.
Judge said in a note that CIBC’s forecast has half-point cuts in December as well as January, but signs of weakness in the September employment data could force the Bank of Canada’s hand and move one of the 50-point cuts to October if the central bank is worried about further deterioration in the labour market.
— with files from Global News’s Anne Gaviola