Quick take

GDP Inches Up As the Weight of Higher Rates Begins To Tell

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  • Real gross domestic product crept up by 0.1 per cent in July, matching the modest rate recorded in the previous month. Statistics Canada’s preliminary estimate shows growth was essentially unchanged in August.
  • The performance among goods-producing sectors was mixed with gains across agriculture, utilities as well as mining, quarrying, and oil and gas extraction more than offsetting declines in manufacturing and construction.
  • Among services, rising interest rates contributed to a flat performance in the real estate, rental, and leasing sector. Cooling consumer and business confidence saw output in both wholesale and retail trade fall, the third consecutive monthly decline in both industries. The public sector, comprised of educational services, health care and social assistance, and public administration, all posted growth.
  • Among the client-facing industries, output rose in the arts, entertainment, and recreation industry. Meanwhile, despite buoyant demand for traveller accommodation, output in the accommodation and food services declined for the first time since January as activity in the food services and drinking places subsector fell.

Key Insights

Rising interest rates are beginning to feed through the economy, causing demand to weaken and growth to slow. This is a prerequisite to bringing inflation back to the target rate. Indications from the Global Supply Chain Pressure Index and the Baltic Exchange Dry Index suggest that global supply chain disruptions are also easing. Although inflationary pressures are weakening, the Bank of Canada is unlikely to take its foot off the brake anytime soon. The economy continues to face inflationary risks from accelerating wage growth, food prices, and continued high demand for services, including transportation and shelter.

With the release of Canada’s 2021/22 population estimates comes confirmation that the federal government has significantly increased immigration levels, welcoming close to half a million immigrants between July 1, 2021, and June 30, 2022. Plans to pursue similarly high targets in the years ahead reflect Canada’s ageing population and low fertility rate. A growing population generates income for households, firms and governments through wages, profits and taxes. Therefore, supporting core-aged population growth and increasing labour supply is key for Canada’s long-term economic trajectory—and immigration is the primary lever.

With economies across the globe navigating difficult economic conditions, there has been marked volatility in financial markets. Pessimism regarding the state of the global economy has become pervasive as rising interest rates stifle growth, nuclear threats enter the war in Ukraine, and China’s economy struggles in the face of strict COVID-19 measures. This has helped to strengthen the U.S. dollar, which is often viewed as a safe haven in tumultuous times. This week, the Canadian dollar fell to a two-year low against its U.S. counterpart. A weaker Canadian dollar lessens the purchasing power of Canadian importers buying goods from across the southern border and is, therefore, inflationary. If, in the months ahead, inflation remains hotter in the U.S. than in Canada, the Federal Reserve may be forced into bigger interest rate hikes than the Bank of Canada and creating further downward pressure on the loonie.

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Liam Daly

Liam Daly

Economist

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