The Canadian economy held steady on a month-on-month (m/m) basis in July, in line with Statistics Canada’s advanced estimate and a tick below market expectations of slight 0.1% m/m growth. The flash estimate for August points toward modest 0.1% m/m growth.
July’s reading was mixed, with output expanding in 9 of 20 industries. Goods producing industries (-0.3% m/m) lagged the 0.1% m/m gain in the services sector.
There was a tug of war between special factors on the goods side. The mining, quarry, and oil & gas sector bounced back to +1.9% m/m, led by mining and quarrying (+4.2% m/m), which were rebounding from wildfire related shutdowns in June. But the port strike on the west coast depressed activity in manufacturing (-1.5% m/m). Agriculture was also down (-1.5% m/m), partially offset the increases in other goods sectors. The construction sector remained flat in July after two consecutive months of declines.
As expected on the services side, the transportation and warehousing sector contracted, albeit modestly, by 0.2% m/m as a result of the British Columbia port strikes. By subsector, water transportation pulled back (-3.4% m/m) alongside air transportation (-2.1%). Surprisingly, rail transportation grew by 1.1% on the month despite the strikes and the inclement weather affecting a rail line in Nova Scotia.
Also in services, finance and insurance rose for the third consecutive month, up 0.3% m/m in July, wholesale trade bounced back (+0.3% m/m), and retail trade slid for a sixth consecutive month (-0.2% m/m).
The advanced reading of a 0.1% m/m gain in August is driven by increases in wholesale trade, finance, and insurance. Partially offsetting this gain is declines in retail trade and oil and gas extraction.
Key Implications
With so many idiosyncratic shocks in Canada this year, it is challenging to distill where activity is trending in the economy. Quarterly GDP estimates to date have been impacted by a host of “special factors”, from the federal workers strike in April, wildfires affecting production in the oil patch in June, the BC port strikes in July, record-breaking wildfire activity, other weather events, and one-time government rebates. Most of the effects of these shocks have now dissipated, and barring any further one-off events, GDP growth should be more predictable over the coming months.
With today’s print and August’s flash guidance, there is downside risk to our modest expectation for 1% growth in the third quarter, as published in our recent forecast. It is also considerably lower than the Bank of Canada’s (BoC) 1.5% estimate. Not surprisingly, today’s print ultimately tamped down the expectations for another rate hike in the coming month, with markets having lowered their probability of a hike at next meeting to 35%. The BoC must balance a slowing growth backdrop against renewed inflation pressures in August, especially across the BoC’s core measures. The BoC will need to remain vigilant and see more evidence of a cooling economy before they can get comfortable on the sidelines. Next week’s update to employment and wages combined with updates to September’s inflation figures next month will be the two key metrics on watch that will inform the BoC’s next policy decision on October 25th.
 basis in July, in line with Statistics Canada's advanced estimate and a tick below market expectations of slight 0.1% m/m growth. The flash estimate for August points toward modest 0.1% m/m growth.){kind=link}