Senior Director of Canadian Economics
Canada: Real GDP Got Knocked Down in Q2 and May Not Get Up Again in Q3
- Real GDP growth dropped by an annualized 0.2% in Q2 (see Table 1 for more information). This was well below the Bank of Canada’s forecast (+1.5%) and the consensus of economic forecasters (+1.2%).
- June real GDP fell by 0.2% m/m, in line with consensus and Statistics Canada’s flash estimate. At the same time, annualized growth in real GDP by industry came in at +0.1% in Q2, reflecting significant downward revisions to prior monthly numbers. Statistics Canada expects a flat print in July 2023. Assuming flat real GDP growth in August and September, this would put Q3 growth in real GDP by industry at -0.4% annualized. That said, some of the weakness can be chalked up to wildfires, which could support positive prints in coming months as rebuilding begins.
Today’s Q2 GDP release came as a shock, posting a contraction when forecasters were unanimously expecting annualized real GDP growth in the 1.0% to 1.5% range. Residential investment was a substantial driver of the move lower, in contrast to the sharp increase in housing starts and resale activity in the quarter. Households also look to be digging in, with the savings rate moving higher as disposable income growth well outpaced the advance in consumption.
Looking ahead, the weakness in Q2 and soft handoff to Q3 suggest the slowing pace of growth is set to continue. We’re currently tracking a modest contraction in real GDP growth in the third quarter of 2023, well below the +1.5% annualized pace expected by the Bank of Canada in its July 2023 Monetary Policy Report. Along with a weakening labour market, this should contribute to a further cooling in inflation in the coming months.
Taking the Q2 real GDP release into account along with a full suite of recent economic indicators should remove any doubt that the Bank of Canada will remain on the sidelines at next week’s meeting. Indeed, today’s data reinforces our view that the Bank is done hiking for this cycle and its next move is likely to be a cut, possibly as early as the first quarter of 2024 (see our recent Economic and Financial Outlook for more information).
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