According to a Reuters survey of economists, Canada's GDP report for the second quarter, scheduled for release on Friday, is likely to indicate a significant decrease in economic growth. This outcome might influence the Bank of Canada to temporarily halt its plans of increasing interest rates, even though recent inflation data has shown higher levels.
The upcoming GDP report holds significance as it will be the final major piece of national data available before the Canadian central bank reaches its next policy decision on September 6th. The anticipated result is that the economy will have expanded at a rate of 1.1% during the second quarter. This is a notable drop from the 3.1% growth experienced in the initial three months of the year and falls below the Bank of Canada's own estimate of 1.5%.
This would provide a sense of relief to the market, given that the most recent CPI report demonstrated inflation surpassing 3% in July. This divergence from the Bank of Canada's target of 2% has led to increased expectations for another interest rate hike in September.
Having increased its benchmark rate to the highest level in 22 years at 5% during July, the central bank is carefully observing economic data before making a decision on the possibility of further interest rate hikes.
Carlos Capistran, the head of Canada and Mexico economics at Bank of America Merrill Lynch, emphasized the significance of this particular data release for the Bank of Canada's decision in September. He noted that the central bank is currently relying on incoming data and has not ruled out the potential for additional rate increases.
A portion of the anticipated deceleration in the second quarter might be attributable to temporary factors, like wildfires, energy project maintenance, and a strike by civil servants. These factors suggest that the initial estimate for July, scheduled to be released alongside the quarterly data, will also play a significant role in shaping the interest rate outlook, according to analysts.
"If clear indications of economic slowdown emerge, it's likely to reassure the BoC that maintaining the current 5% rate is prudent, allowing them to gather more data," explained Benjamin Reitzes, who serves as the Canadian rates & macro strategist at BMO Capital Markets.
Money markets are indicating around a 70% likelihood that the Bank of Canada will opt for a pause in September, but there's a leaning toward further tightening by the year's end. This trajectory could lead to interest rates reaching their peak at 5.25% within the present cycle.
The July projection comes in the wake of recent initial data indicating a decline in activity during June. This projection could potentially be impacted by a strike carried out by dock workers last month at ports along Canada's Pacific coast.
"Considering the probable decrease in GDP during June and the subsequent port strikes in July, there exists a reasonable possibility of observing a negative GDP figure for the third quarter," remarked Stephen Brown, deputy chief North America economist at Capital Economics.
The Bank of Canada has put forth a forecast of 1.5% growth for the third quarter, aligning with its estimate for the second quarter.
However, there are economists who do not anticipate a halt. They contend that the way growth is structured in the data for the second quarter, including the distribution between domestic and foreign demand, might also play a role.
"If there's still a notable strength in domestic demand, primarily driven by a resurgence in housing and consumer expenditure on services, and the July data indicates a promising beginning for the third quarter, the Bank of Canada might opt to persist with its interest rate hike trajectory at the September session," explained Andrew Grantham, a senior economist at CIBC Capital Markets.
