The Canadian economy grew more quickly than expected in the second quarter, but likely not enough to put the brakes on an anticipated third straight rate cut in September by the Bank of Canada.
The Bank of Canada’s economy — as measured by gross domestic product — grew by 0.2 per cent in May over the month before, Statistics Canada announced Wednesday morning. Preliminary data also showed the economy grew by 0.1 in June.
That puts the Canadian economy on course to grow at an annualized rate of 2.2 per cent in the second quarter, higher than the Bank of Canada’s estimate released just last week.
The data presents something of a mixed picture, BMO chief economist Douglas Porter wrote in a research note.
“Make no mistake, the Canadian economy is paddling fast just to keep its head above water,” Porter wrote, “but it is still managing to slowly move forward.”
But there’s still more crucial economic data to come before the bank’s next interest rate announcement on Sept. 4, Porter said in a message to the Star — inflation and employment numbers.
“The upcoming CPI and unemployment rate are far more important,” Porter said.
CIBC chief economist Avery Shenfeld, in a nod to the Paris Olympics, called the data “not a medal-winning performance.”
“While Canada’s GDP gains in May and June were a touch better than we expected,” Shenfeld wrote in a report, “this wasn’t a medal winning performance given the strong pace for population growth.”
Shenfeld said the Bank of Canada’s projection of 2.8 per cent annualized growth in the third quarter is likely a little too optimistic, and said the bank would likely cut rates again in September.
“Q3 growth … still seems likely to fall short of the Bank of Canada’s optimistic take,” Shenfeld said. “None of that alters our call for another quarter point rate cut by the Bank of Canada in September, with that decision being much more tied to the progress we’ve seen on underlying inflation measures.”
RBC economist Abbey Xu agreed that the bank is likely to cut rates again in September.
“We think the economic backdrop should give the Bank of Canada room to deliver another interest rate cut in their next meeting in September,” Xu said.
In its most recent monetary policy report, the bank forecast that the Canadian economy would grow at an annualized rate of 1.5 per cent in the second quarter, and by 2.8 per cent in the third quarter.
The bank has cut its key overnight lending rate two straight times, bringing it down to 4.5 per cent.
In announcing a cut to 4.5 per cent from 4.75 per cent last week, the bank said it would consider cutting again, if inflation kept falling and economic growth stalled.
The bank raised rates 10 times, to five per cent from 0.5 per cent, between March 2022 and last summer in a bid to wrestle inflation down to its two per cent target.
The theory is that by making it more expensive to borrow money, consumers and businesses will spend less, driving down prices and slowing the economy.
Now, as the economy slows and inflation has been moving downward, the bank is taking the reverse approach, trying to stimulate growth by cutting interest rates.
Still, not everyone’s convinced that more cuts are a good idea. Scotiabank economist Derek Holt says the economy is strong enough that more cuts risk undoing the recent progress on inflation.
“Throughout the past 2-3 years I have consistently leaned on the positive side of the economy, warning that premature and overly aggressive easing risked reigniting inflation risks. Data continues to support this bias,” Holt wrote in a research note.
