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Economy Continues with Steady Path

Canadian Economics

By: Viktor Cicman

    

  • Real GDP grew 0.2 per cent in May, following a 0.3 per cent increase in April. The goods-producing industries were the main contributor to the overall growth with four of five sectors increasing in May.
  • Among goods-producing industries, manufacturing led growth, rising by 1.0 per cent. The manufacturing sector went up for a second consecutive month as both durable and non-durable goods manufacturing rose in May. Notably, non-durable goods manufacturing recorded its largest monthly growth rate since November 2023, rising by 1.4 per cent, with over half of the increase stemming from petroleum and coal product manufacturing.
  • The mining, quarrying and oil and gas extraction sector contracted 0.6 per cent in May, partially offsetting a 2.1 per cent rise in April. The oil and gas extraction subsector accounted for the entire contraction. Oil sands extraction was down 3.5 per cent, its largest contraction since January, as maintenance at some upgrading facilities in northern Alberta contributed to the decline.
  • Services-producing industries edged up 0.1 per cent in May. The public sector had the largest increase among services, increasing by 0.4 per cent, its fifth consecutive monthly gain. Educational services were another significant contributor to growth, rising by 0.5 per cent, led by elementary and secondary schools which posted its fifth monthly increase in a row following the public sector strike in Quebec last year.
  • Accommodation and food services grew for the second consecutive month, increasing 0.9 per cent in May. The growth was largely driven by food services and drinking places, which increased by 1.2 per cent. Arts, entertainment and recreation rose for the third month in a row, largely driven by performing arts, spectator sports and related industries. Contributing to increased activity in the sector was the fact that three Canadian National Hockey League teams continued playing in the playoffs throughout the month of May.
  • Wholesale and retail trade both contracted in May. Retail trade contracted by 0.9 per cent, with most retail segments posting declines.The wholesale trade sector contracted by 0.8 per cent, with five of nine subsectors decreasing in the month. Motor vehicle and parts wholesalers drove the decline in May, declining by 4.0 per cent.

Key Insights

The economy continues to show moderate growth with the latest second-quarter data showing real GDP increased by 0.2 per cent, slightly below April’s 0.3 per cent rise. Advanced estimates suggest a similar trend for the following month, with growth projected at 0.1 per cent, and the second quarter as a whole rising by 0.5 per cent. Despite historically strong population growth over the past year, Canada’s economy has been navigating through choppy waters. The unemployment rate has been gradually rising, reaching 6.4 per cent in June. Preliminary estimates also showed retail sales declining in June. The good news is that the economy remains poised to turn the corner in the second half of the year, on the back of a second consecutive interest rate cut announced by the Bank of Canada last week.

The Bank of Canada’s recent interest rate decision reflects the gradual success of its inflation management strategy, initiated in March 2022. Headline CPI inflation decreased to 2.7 per cent last month, prompting the Bank to cut interest rates for the second consecutive month. However, the Bank’s ability to make further cuts is constrained by actions of the U.S. Federal Reserve, which has yet to adjust its rates. Even though data has suggested deteriorating U.S. economic growth, the economy just posted 2.8 per cent growth in the second quarter, improving from the first quarter growth rate. Significant divergence from Canada’s largest trading partner could impact other areas of the economy, such as through a depreciating loonie. Nevertheless, we still expect the Fed to begin cutting interest rates in September, which should ease some of the Bank’s concerns.

To learn more about Canada’s economic outlooks for the long-term or the next five year’s, please visit our Canadian Outlook.

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