Canadian GDP To Show Slowing Growth, Or The BoC May Hike Rates: RBC

Monday Aug 28th, 2023


Canadian GDP To Show Slowing Growth, Or The BoC May Hike Rates

Canada’s biggest bank is warning investors of an economic slowdown brewing. Gross domestic product (GDP) data for Q2 won’t be released until next week, but RBC expects it to show the economy was hit with a sharp slowdown. Coupled with a mild acceleration to inflation, everyone has one question—is a slowing economy enough to prevent further rate hikes?  

Preliminary Estimates For Canada’s GDP Show A Sharp Deceleration

Canada’s plan to use rapid population growth to stimulate demand isn’t producing the desired effect. Statistics Canada (Stat Can) released its preliminary estimate showing annual GDP growth falling to just 1% in Q2. It’s a sharp deceleration from the previous quarter (+3.1%), leaving annual growth lower than population growth. 

In short, a per capita decline is already occurring, it’s just being obfuscating at the aggregate level. A slowdown is already happening, it’s just not being reflected in the government’s preferred numbers. If you’re wondering why reality doesn’t match the data, it’s because the data is lagging on this one.

Canada’s slowdown isn’t exactly a surprise. Both the Bank of Canada (BoC) and RBC had forecast growth deceleration. “That’s not significantly different from our tracking for a 0.5% increase and is slightly below the Bank of Canada’s estimate for a 1.5% increase in the quarter.” Said Nathan Janzen, assistant chief economist at RBC. 

Weaker Consumers, Less Investment

Janzen’s analysis appears to see a broad slowdown across consumers and investors. Consumers are beginning to show exhaustion when it comes to consumption, especially spending on goods. The bank points to the 3% drop for retail recently reported, reminding us this was the largest decline since lockdowns. 

Investors are also showing fading enthusiasm in this market. Janzen highlights the move in residential investment, which is the capital spent on building new housing, and substantial renovations. The BoC pause sent it soaring at the start of the quarter, but a rate hike proved there was no pause by the end of it. Consequently, it fell off a cliff almost immediately, and has yet to recover. 

Non-residential investment is also forecast to show low to negative growth. The bank points to the 5.5% quarterly drop in real imports of industrial machinery, equipment, and parts. Since investors typically have to pump money into scaling operations when things are good, the decline is a fairly ominous sign. 

Canada’s Economic Slowdown Is Just Getting Started

Most of the fading market wasn’t observed at the start of the quarter, but the end. That can be a sign that things will get worse, and RBC appears to be taking that position. “Early data for July is suggesting that the softening momentum in June extended into Q3,” says Janzen. 

He points to cooling labor markets, which aren’t likely to spring back after just a quarter. Unemployment rose 0.5 points over the last 3 months reported. He also sees vacancy data coming in lower in the next round of data. Not investing in businesses tends to produce fewer jobs. Surprising, right? 

Will The Slowdown Be Enough To Prevent Rate Hikes?

The slowdown is an expected consequence of rising rates, helping to reduce excess demand. While the data sounds bad, it’s not much worse than 2019, before unprecedented stimulus distorted almost every facet of the economy. However, it’s unclear if the slowdown will be enough to prevent more rate hikes. Especially given the mild inflation acceleration the BoC is trying to prevent. 

“Policy makers clearly are willing to respond with additional interest rate hikes if momentum in the economy isn’t softening enough to ensure inflation pressures will trend lower,” warns Janzen. 

However, he believes if his forecast is on point, the central bank is unlikely to hike next month. “… we expect there will be enough signs of cooling demand to-date for the BoC to forego another increase in the overnight rate in September,” says Janzen. 

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