Despite flat growth, central bank expected to keep raising rates to get inflation under control

Canada’s economy didn’t expand at all in May, the second month of the year that its failed to eke out any gains, Statistics Canada said Friday.

The data agency said that a slight uptick in the service sector wasn’t enough to offset a decline in goods-producing industries, so the total value of all economic output during the month was essentially unchanged from what it was a month earlier.

The flat showing was actually better than the slight decrease of 0.2 per cent that economists had been expecting.

An advanced estimate for June suggests that the economy fared only slightly better last month, too, with an increase of 0.1 per cent.

Final numbers won’t be available until the end of August, but if June’s advanced figure bears out, that means Canada’s economy grew by 1.1 per cent in the second quarter — not a strong showing by any metric, but at least better than the contraction of 0.9 per cent seen in the U.S. over the same period.

“Today’s [Gross Domestic Product] data suggest that the Canadian economy was slowing even before the largest of the Bank of Canada’s rate hikes was delivered,” CIBC economist Andrew Grantham said.

Momentum may be cooling, economist says

Scotiabank economist Derek Holt said while it was good to see the economy didn’t contract in May, there’s little to suggest things are chugging along nicely heading into the second half of the year.

“It’s looking like momentum may be cooling off,” he said. “There is no running head start for Q3 GDP based upon the math to this point.”

Others found reason for optimism in the numbers. Bank of Montreal economist Doug Porter noted that the annualized pace of growth in Canada’s economy in the first half of this year was 3.75 per cent.

That’s a full five percentage points better than the U.S., which was shrinking at a 1.25 per cent pace over the same period.

“While growth is now clearly simmering down rapidly after the big bounceback, it compares very favourably to U.S. trends,” Porter noted.

Impact on interest rates

The GDP numbers come against the backdrop of stubbornly high inflation, which has risen to its highest level in decades during the pandemic. Accordingly, Canada’s central bank began a campaign of increases to its benchmark lending rate, in order to cool things down.

Economists thought before the GDP number that the central bank is likely to keep raising its rate due to inflation, and Friday’s mediocre GDP data will do little to diverge from that path.

“We continue to see the central bank raising rates by 50 basis points in September,” economist Royce Mendes with Desjardins said.