Stalling economy set to miss Bank of Canada forecast

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Growth in the Canadian economy remained unchanged in August, putting gross domestic product on track to grow at an annualized rate of just one per cent in the third quarter, Statistics Canada said on Thursday, paving the way for another cut by the Bank of Canada in December.

The third-quarter reading includes an early estimate for growth increasing by 0.3 per cent in September.

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The Bank of Canada revised its forecast for third quarter GDP down to 1.5 per cent in its monetary policy report earlier this month, but growth is still on track to fall below that.

Bank of Canada governor Tiff Macklem said policymakers would like to see economic growth strengthen after delivering a 50-basis-point cut to its policy rate last week, bringing the overnight rate down to 3.75 per cent.

Douglas Porter, chief economist at the Bank of Montreal, said the latest GDP growth numbers will favour another cut to interest rates by the central bank, but more data is needed to determine whether it will be a 50- or 25-basis-point cut.

“While far from conclusive, chalk this one up on the dovish side of the ledger,” he said in a note. “However, the Bank of Canada will see another GDP result (the full Q3 report) before next deciding on rates, along with two jobs reports and another CPI, so this less-than-scary reading hardly settles the debate over the next move.”

The goods-producing sector contracted by 0.4 per cent in August, reaching its lowest level since December 2021. Manufacturing led the monthly decline, contracting by 1.2 per cent. Extended maintenance shutdowns in the auto industry in Ontario contributed to the decline, with auto and parts manufacturing decreasing by 1.9 per cent. Other industries that reported declines include utilities (1.9 per cent) and wholesale trade (0.6 per cent).

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Transportation and warehousing also declined by 0.3 per cent, driven by the work stoppages at Canadian National Railway Co. and Canadian Pacific Kansas City Ltd. The brief shutdown of the two railways impacted the transportation of major commodities such as meat, medicine and hazardous chemical materials.

Marc Ercolao, an economist at Toronto-Dominion Bank, said the GDP growth readings won’t raise any “alarm bells,” but do emphasize the Bank of Canada’s concerns about a weakening economy.

“That said, we think the cumulative 125 basis points of cuts delivered to date will do its part in reigniting economic activity into the end of the year,” he said in a note. “Looking ahead, more cuts are on the way, with the focus now shifting to upcoming labour market and inflation data.”

Declining industries were offset by growth in the finance and insurance sector, which grew for the third straight month by 0.5 per cent. Growth in the financial investment services posted a gain of 2.6 per cent in August. Mining, quarrying and oil extraction posted a 0.6 per cent gain, driven by a 1.5 per cent increase in oil extraction.

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The public sector posted an eighth consecutive monthly gain in August, growing by 0.2 per cent. Growth was led by public administration, with local, municipal and regional governments being the main contributors.

“We all complain about ‘the government,’ but without it, the GDP backdrop would be looking a lot worse,” David Rosenberg, founder and president of Rosenberg Research & Associates Inc., said in a note. “Business-sector GDP fell 0.1 per cent month over month and has been flat or down in each of the past four months. The public sector expanded 0.2 per cent month over month, and at 2.7 per cent on a year-over-year basis, it is running at nearly triple the pace of the private sector.”

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