August saw Canadian economic activity climb modestly, up 0.1% month-on-month. The gains were fairly concentrated, as just 8 of 20 major industries expanded.
The service sector led the way, gaining 0.1% as strength in finance and insurance (+1.0%), real estate (+0.3%) and professional services (+0.3%) offset modest pullbacks in a few key areas, notably transportation (-0.5%) and retail trade (-0.2%).
The goods producing sectors were effectively flat on the month in aggregate. A rebound of oil and gas helped drive mining, quarrying, and oil & gas to a 0.9% monthly expansion, while utilities rose for a second month (+0.8%). Holding the sector back was a pullback of manufacturing output (-0.6%) and a third monthly decline in construction activity (-0.4%).
Key Implications
That could have been worse. Despite some weakness in the headline-grabbing sectors – notably manufacturing sales and retail trade – the Canadian economy eked out a modest gain in August on the back of a rebound in the oil and gas sector, alongside a surge of market activity that helped the financial sector. To be sure, this report could have been stronger, but it also could have been weaker.
Indeed, without those key contributors, the economy would likely have contracted. Just eight sectors expanded in August, the worst breadth in nearly six years. The lack of breadth may be a bit discouraging, but economic growth for Q3 is nevertheless tracking around 2%, just a tick above the Bank of Canada’s latest projections (see commentary). What’s more, some of the August weakness looks likely to reverse in September, and the lifting of uncertainty delivered by the USMCA should contribute to an above-trend pace of expansion thereafter in both our, and the Bank of Canada’s, view.
Combine a healthy economic outlook with the tilt towards hawkishness that accompanied last week’s rate hike, and you have the recipe for further monetary tightening. The Governor has made it clear that every rate decision is ‘live’, which could bring a December hike into play. However, GDP is only slightly outperforming the Bank’s forecast and core inflation is still largely on target. Thus, we remain comfortable in our view that the next hike is most likely to come with the January 2019 decision.
