Canada’s Economy Continues Growing

Insights

Today’s release of GDP estimates shows that Canada’s economy began the second quarter with moderate growth of 0.3 per cent, an improvement over last month’s flat reading. The economy has shown growth in three of the last four months, marking a stronger performance compared to the latter half of 2023. Robust population gains have been one of the main factors helping lift the economy. However, GDP per capita has seen a decline for six of the past seven quarters. On the flip side, population growth has also helped mitigate inflationary pressures by expanding the labour market. Looking ahead, as population growth slows and consumers remain financially stretched, monetary policy will take on a more substantial role.

Last month, the Bank of Canada cut rates for the time since beginning its inflation management strategy in March 2022, as growth in the CPI reached levels not seen in decades. With inflation broadly trending downward and the unemployment rate increasing to 6.2 per cent in May, the Bank deemed that interest rate adjustments were achieving their intended effects, prompting them to cut their policy interest rate by 25 basis points. The good news is that consumers and businesses will start to see relief in their pocketbooks, helping to lift the economy in the latter half of the year.

However, the extent of future rate cuts remains uncertain and will depend on several factors.  Statistics Canada’s inflation reading for May saw year-over-year CPI rise by 2.9 per cent, up from 2.7 per cent in April. The results cast further doubt on how quickly the Bank will reach its 2 per cent target, ultimately impacting the pace of interest rate reductions. Moreover, the Bank will likely consider aligning its actions closely with the Federal Reserve, which has postponed its own rate cut until at least September.