Leading Canadian economists warn that further data could demand further tightening
The Canadian economy is showing signs of softening, but has the Bank of Canada done enough to keep inflation controlled?
Reactions to the latest GDP data from Statistics Canada from leading Canadian economists come with an underlying warning that we are not yet in the comfort zone of increased certainty.
With real GDP essentially flat in July following a 0.2% decline in June, less than half of industries reported increases (services fared better than goods) and the latest stats means the Canadian economy has now stalled for two quarters, although recession has been avoided so far.
The figures for July reflect some unusual activity with wildfires and strikes, so there is optimism that a bounceback will be reflected in the August GDP statistics.
However, there are no clear signals either for or against a further interest rate hike before the end of 2023.
Wealth Professional has collated some opinions on the GDP figures from leading economists.
CIBC
CIBC Economics’ Andrew Grantham notes that the weakness in GDP results mainly from supply disruptions, so inflationary pressures may not be eased in the near-term.
“However, with retail sales on a clear weakening track, there should be enough evidence that domestic demand is responding to higher interest rates to prevent a further interest rate hike from the Bank of Canada this year,” he wrote in his commentary.
TD
TD Economics’ Marc Ercolao opined that it’s “challenging to distill where activity is trending in the economy,” but with strikes and wildfires having dissipated in August, “GDP growth should be more predictable over the coming months.”
With the GDP data likely to have weakened the outlook for the third quarter, he notes that it has become less likely that the BoC will hike rates at its October 25 meeting.
But it’s not certain, especially with inflation not tamed, however he says that employment and wages data due this week, and September inflation stats later this month, will all be key metrics to be considered before the BoC makes its decision.
BMO
BMO’s director of economics, Robert Kavcic, says the struggle is “starting to look real” for the Canadian economy.
His team are not expecting much real growth until at least the spring and highlights the softening in the labour market (from extremely tight levels) while population growth is impacting per capita measures of the economy.
All things considered, Kavcic concludes that “…the Bank will keep leaning on the economy and inflation with the tightening that has already been put in place, while downside pressures continue to build.”
RBC
At RBC Economics, Claire Fan also notes the data dependence of the BoC’s policy decisions.
“Firmer-than-expected inflation readings in Canada have increased the odds of another BoC interest rate hike this year. But inflation lags the economic cycle and there are growing signs that the impact of earlier interest rate increases are working to cool the economy,” she wrote in her analysis, noting the CPI and labour market data due before the October rate decision.
Scotiabank
Meanwhile, Scotiabank’s Derek Holt says that “GDP is the least important indicator on the path to October’s BoC decision” and that “trend inflation risk remains pointed higher.”
With inflationary impacts from strong immigration while some other economic metrics are weakening, deciding what the BoC might do is tough to call.
“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,” Holt added.
