The Canadian economy recorded no growth in May, beating Statistics Canada’s flash estimate for a contraction of 0.2% month-over-month (m/m). The flash estimate for June showed a mild return to growth of 0.1% m/m.
May’s results showed output expanding in 14 of the 20 industries. The goods-producing sector contracted 1.0%, while the service-producing sector rose 0.4%.
On the goods side, construction (-1.6% m/m) and manufacturing (-1.7% m/m) led the declines. The mining, quarrying and oil and gas sectors, pulled back marginally (-0.1% m/m) after strong growth of 3.1% the month prior.
Demand for in-person services continues to increase. The arts, entertainment, and recreation sector expanded 2.7% m/m, as it continues its climb back to pre-pandemic levels. Transportation and warehousing also expanded robustly (+1.9% m/m), with air transportation rising 14.1% in May.
Key Implications
With no growth in May and the +0.1% m/m print for June, tracking for second quarter GDP growth is now 4.6% (annualized). This is slightly better than the 4.4% we anticipated earlier in the year in contrast to the declines observed stateside. However, in a sign that demand growth is responding to inflation and rising interest rates, momentum is slowing, with May and June showing little growth.
Slowing growth shouldn’t deter the Bank of Canada (BoC) from continuing with its rate hiking cycle. Interest rate hikes were supposed to slow growth and intermittent contractions were always a possibility. As inflation remains well above target and the economy continues to operate in excess demand we expect the BoC to continue raising rates until they get to 3.25%.
