Real GDP Rises in July, but Third Quarter Still Expected to be Weak

Insights

Today’s release of GDP estimates indicates that Canada’s economy manages to attain growth despite the negative impact from wildfires. However, the overall picture is far from rosy. The Canadian economy showed no growth in June, and advanced estimates reveal that real GDP was unchanged for August. And although the economy began the first half of the year slightly stronger than expected, a closer look at the data reveals that the underlying economic conditions were weaker than the headline numbers suggested. The unemployment rate has risen throughout the year, reaching 6.6 per cent in August. A weaker labour market has impacted consumer spending, with household spending per capita falling in the second quarter, its sixth quarterly decline since mid-2022. Meanwhile, business confidence has remained concerningly low in 2024, which will weigh on business investment in the near term.

The slowing economy prompted the Bank of Canada to start cutting rates in June, reducing them by a quarter point, followed by further 25 basis point cuts in July and September. Today’s GDP estimates reflect only two of the cuts, but interest rate changes can take well over a year to completely filter through the economy. With more cuts expected in October and December, the positive news is that consumers and businesses will benefit from lower borrowing costs in the latter half of the year and into 2025. While the Bank of Canada must carefully navigate the balance between lowering rates enough to support the economy and avoiding a resurgence of inflation, we see the Canadian economy on a clear path to recovery after its current slowdown, with inflation remaining within the Bank’s target range until rates reach their neutral levels by late 2025.