Canada’s gross domestic product report for July next Friday will be closely watched to see if cooling in the economy in late Q2 extended into Q3.
Early reports are pointing to a 0.1% increase in July GDP that would be slightly higher than the advance estimate for an unchanged reading a month ago but would still extend a string of softer readings dating back to May. Most of a 2.1% annualized increase in Q2 GDP came from a 0.4% jump in output in April. Growth softened to 0.1% in May followed by no growth in June. The increase we expect in July is still historically soft and would leave output tracking another per-capita GDP decline in Q3—marking the eighth out of the last nine quarters.
We expect the small increase in July growth was evenly split across goods and services. The details of the July manufacturing sales report are consistent with a 0.6% increase in manufacturing GDP. But, a drop in oil sands production in Alberta and a pull-back in oil drilling activity is expected to weigh on growth. Meanwhile, wholesale and retail sales were both up in July, but our tracking of credit card transactions is pointing to little change in spending in the hospitality sector.
Slowing inflation has allowed the Bank of Canada to shift focus to concerns about a softening economy and a rising unemployment rate. Our forecast of around 1% annualized growth in Q3 GDP would be well below the BoC’s July forecast for a 2.8% increase. Our base case forecasts assume the BoC will continue cutting interest rates at a pace of 25 basis points per meeting, but with risks tilted to a faster pace of reductions (in line with the U.S. Federal Reserve’s larger 50 bps initial cut) if the economy softens significantly further.
Week ahead data watch
We expect U.S. personal consumption to edge up 0.1% in August, down from 0.5% in July. Retail sales growth slowed in August on softer auto sales and lower sales at gas stations. U.S. personal income likely increased by 0.4% in August from 0.3% in the previous month. It’s consistent with higher wage growth from July to August.
Canadian July SEPH data will be watched closely for further signs of cooling in the labour market. The previously released Labour Force Survey showed a small 3,000 dip in employment in July, followed by a 22,000 bounce back in August. But job openings (captured in SEPH, not the LFS) likely continue to decline on slowing hiring demand. Wage growth in SEPH will also be in focus, because it has been underperforming the same measure in LFS.
