Senior Director of Canadian Economics
Canada: A Below-Consensus GDP Print Likely Won’t Dissuade the Bank from Hiking Again
- Real GDP was flat in April, coming in below consensus expectations and Statistics Canada’s flash estimate, both at 0.2%. Goods-producing sectors eked out a modest gain (0.1%), while services-producing sectors stayed on the sidelines (0.0%). In all, 11 of 20 sectors posted an advance.
- The output gain in goods-producing sectors is largely a story of mining and oil and gas extraction (1.2%), which followed a similar solid print in March. However, construction also posted a respectable gain (0.4%), unsurprisingly given the upward move in housing starts in the month. But given the drop in housing starts in May, we could see this reverse somewhat in the next release. In contrast, manufacturing output dropped 0.6% in April, with most subsectors posting losses. Notably, this stands in contrast to the advance in real manufacturing shipments in the month.
- And then there is the flat print in services-producing sectors in April. The federal public service strike is largely to blame for that one, causing output in public administration to fall by 1.0%. While not initially picked up in the Labour Force Survey, the survey of employers for April made it clear that the impact was substantial. Output in other services-producing sectors was more mixed, with wholesale trade falling sharply (-1.4%) while real estate and rental and leasing advanced 0.5% for its largest monthly move since December 2020.
- On a year-over-year basis, real GDP was up 1.7% from its year-ago level, continuing a sustained downward trend, for the smallest year-over-year gain since the dark days of the pandemic.
- Statistics Canada’s flash estimate of real GDP is for an increase of 0.4% in May. Manufacturing and wholesale trade are also expected lead the advance, while activity among real estate agents and brokers should also post another positive month. Federal government public administration is also expected to be a contributor to the monthly gain, as public servants returned to work following the strike in April. In contrast, Canada’s statistical agency expects the resource sector and utilities to be a drag on activity, possibly as a result of wildfires.
Another month of below-consensus real GDP growth should be good news for the Bank of Canada. Indeed, even if the advance of 0.4% in May comes to fruition, a flat print in June would put quarterly growth in Q2 real GDP by industry at 1.4% annualized—half the pace posed in Q1 2023. It also wouldn’t be far from the Bank’s latest forecast for the quarter of 1.0% (our nowcast puts Q2 real GDP growth in the 1.5% to 2% range). However, the Bank probably won’t be happy about the sustained output gains in the economy outside of the public sector so far in Q2, particularly in real estate. Combined with the ongoing reluctance of core CPI inflation to trend toward the Bank’s 2% target, we continue to expect the Bank will hike by another 25 basis points at its July meeting. It will also likely keep the door open to further hikes depending on how the data develops.
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