Highlights:
- Canadian GDP rose 0.1% in August to build on a 0.2% gain in July. Markets expected a flat reading in August.
- Details were softer with a jump in oil sands production and utilities output in particular not likely to be repeated.
- Looking through monthly wiggles, the data remains consistent with GDP rising 2% in Q3 — broadly in line, and perhaps slightly stronger than the Bank of Canada’s 1.8% forecast.
Our Take:
Details were softer than the (slightly) stronger-than-expected 0.1% headline GDP increase would imply. A 3.2% jump in oil sands production won’t likely be repeated to the same extent — the gain retraced a similar sized drop the prior month due to transitory production disruptions. Similarly, warm weather boosted utilities output for a second straight month. That will reverse as temperatures return to normal. Activity outside of those components was little changed. Manufacturing, retail, and wholesale sales all dipped lower, broadly in line with earlier-released monthly sales reports for the sectors with other services components posting trend-like increases on balance.
Looking through monthly volatility, though, the economic backdrop continues to look strong. On a year-over-year basis, GDP was up 2.5% in August, led in part by a large gain in oil & gas extraction but also solid year-over-year growth in manufacturing and services output. Indeed, business surveys are increasingly reporting that capacity constraints, not lack of demand, are the most pressing concern at the moment in much of the country. Wage growth has lagged despite tight labour markets but rising business need for workers still means wage growth is more likely to strengthen than slow going forward. Yet interest rates are still very low. Absent an unexpected shock to the economy, that backdrop leaves little reason for the Bank of Canada not to follow through with further gradual interest rate hikes.
