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Economy Rebounds Partially in July

Canadian Economics

By: Viktor Cicman

    

Real gross domestic product (GDP) increased 0.2 per cent month-over-month in July following a decrease of 0.1 per cent in June. This was the first increase in four months.

  • The expansion was primarily driven by the good producing sectors. These sectors grew by 0.6 per cent in July, rebounding after three straight months of decline, as all sectors within the group posted gains.
  • Mining, quarrying, and oil and gas extraction sector lead the growth, rising by 0.6 per cent, following a sharp drop of 0.7 per cent in June. Oil sand production also helped lift the oil and gas sector, expanding by 1.2 per cent. Meanwhile, oil extraction facilities continued to ramp up production of synthetic crude oil and crude bitumen extraction.
  • The manufacturing sector expanded 0.7 per cent in July, recovering some of its sharp losses in the June where it saw a 1.5 per cent contraction. Transportation equipment manufacturing led the growth, supported by expansions in motor vehicle parts, rising by 10.5 per cent, and motor vehicle manufacturing, also seeing a robust 9.1 per cent rise. This coincides with higher exports of motor vehicles and parts seen in the month.
  • However, it is not all good news in manufacturing. Primary metal manufacturing fell by 5.5 per cent, tempering some of the growth in the sector. Iron and steel mills and ferro-alloy manufacturing fell 19.1 per cent, its steepest decline since April 2020. This was the result of lower exports as the U.S. tariffs on Canadian steel imports doubled to 50 per cent at the beginning of June.
  • Real estate and rental and leasing rose by 0.3 per cent in July, rising for the fourth consecutive month. Increased home resales, particularly in Ontario and British Columbia, drove the increase.
  • Retail trade declined by 1.0 per cent in July, with widespread declines reported across retail segments. After leading the growth in June, food and beverage stores was one of the largest contributors to the decrease in July, falling by 2.0 per cent.

Insights

With the release of GDP by industry data, the economy showed a partial rebound entering the third quarter, rising by 0.2 per cent in July. Real GDP declined in the previous quarter and is expected to be roughly flat in the third quarter. This means the economy will avoid a technical recession—defined as two consecutive quarters of decline—albeit marginally. Despite today’s positive reading, the economy limped into the third quarter and is still trying to recover from the damage caused by trade disruptions.

The economy will get modest support by the Bank of Canada’s decision to cut its key policy rate to 2.5 per cent this month, its first move since March. This decision followed two consecutive job reports showing employment losses in July and August and a rise in the unemployment rate to 7.1 per cent in the latter month.  The rate cut reflects concerns about a weakening economy, with slower growth reducing inflationary risks in the economy. While this opens the door to additional rate cuts to support economic growth, it is likely the worst of the slowdown is behind us, as we think the Bank is done with its rate cutting cycle.

Meanwhile, Prime Minister Mark Carney intends to streamline a series infrastructure projects aimed at revitalizing Canada’s economy. These include the LNG expansion in northern British Columbia, the Darlington nuclear plant, a Port of Montreal expansion, and new investments in critical mineral mining and processing. While these initiatives are expected to boost the economy over the medium to long-term, near-term growth will remain sluggish unless a breakthrough deal on trade occurs. Absent a new trade pact with the United States, short-term economic performance will depend on the strength of consumer demand and the resilience of key sectors such as energy, manufacturing, and exports.

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

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