The Canadian second-quarter GDP report is poised to unveil a substantial deceleration in economic expansion as of upcoming Friday’s release, as outlined by economists’ forecasts. This abrupt shift in momentum could potentially impact the stance of the Bank of Canada regarding its interest rate elevation strategy despite recent inflation data displaying a consistent upward trajectory.
The projection suggests that the economy will have expanded at a rate of 1.1% during the second quarter, a noteworthy decline from the preceding quarter’s growth rate of 3.1% and falling short of the Bank’s original projection of 1.5%.
Canadian Central Bank working to keep inflation below 2%
The upcoming GDP report is the final significant data point the Canadian Central Bank requires before formulating its upcoming policy decision in early September. Financial analysts are closely watching the developments in light of the recent Consumer Price Index report, which indicated an inflation surge surpassing 3% in July. This inflation level has further deviated from the Bank’s targeted 2%, nurturing expectations for another rate increase in September. Nevertheless, a subdued growth in GDP could prompt the Bank to reassess its tactical approach.
Several isolated factors, such as wildfires, energy project maintenance, and a civil servants’ strike, might have played a role in the presumed slowdown during the second quarter to a certain extent. Economists speculate that these temporary factors could influence the preliminary estimate for July, which is set to coincide with the quarterly data release. If this projection holds, it will influence the rate projection more.
Meanwhile, a deceleration in economic growth may temporarily lead the Bank of Canada to halt interest rate hikes. A market analyst notes that clear indications of an economic slowdown could allow the Bank to maintain the 5% threshold until a more comprehensive dataset is available. However, there exists a 70% likelihood of the Bank gradually increasing interest rates towards the year-end, potentially reaching a peak of 5.25% within the current cycle.
Recent data indicates a contraction in June activities, aligning with the dock workers’ strike that occurred last month at multiple ports along Canada’s Pacific coast. These factors could significantly impact the third-quarter GDP projection, raising concerns about this period’s potential negative GDP report.
While economists disagree, some argue that inflation remains a paramount concern that cannot be disregarded. They believe that robust internal demand, coupled with positive shifts in housing and consumer spending on services, might pressure the Bank of Canada to persist with interest rate hikes during their September meeting, irrespective of the subdued growth experienced in the second quarter.