Canada’s economy managed modest growth in May, expanding by 0.2% as gains in manufacturing and public-sector activity offset weakness elsewhere. Statistics Canada reported that retail and wholesale trade, along with parts of the oil and gas sector, weighed on monthly growth, but the Trans Mountain pipeline expansion provided a notable lift that month.
Statistics Canada highlighted the pipeline’s impact in its report: the crude oil and other pipeline transportation industry rose 1.5%, in part reflecting the start of operations of the expanded Trans Mountain pipeline and the departure of the first tankers carrying Western Canadian oil from the Port of Vancouver in late May.
Economists said the May data were slightly stronger than anticipated, but still underline the broad message that economic growth remains tepid. Many analysts interpret the figures as reinforcing the case for further monetary easing by the Bank of Canada to support activity and bring the economy back to a more robust growth path.
The federal agency’s preliminary estimate for June shows growth easing to 0.1%. That modest expansion was driven by gains in construction, real estate and rental and leasing, and the finance and insurance sectors, while declines in manufacturing and wholesale trade partially offset those increases.
What is GDP?
Gross domestic product (GDP) is the standard measure economists use to quantify the total value of goods and services produced within a country over a given period, typically a quarter or a year. GDP can be calculated by tallying output, incomes, or expenditures to arrive at a consistent estimate of overall economic activity.
Read the full definition in the MoneySense Glossary: What is GDP?
GDP growth higher than predicted
For the second quarter, Statistics Canada expects real gross domestic product to have grown at an annualized rate of about 2.2%. That pace suggests the Canadian economy made some progress in the closing months of the quarter, even if gains on a per-person basis remain modest when accounting for population growth.
CIBC chief economist Avery Shenfeld noted that Canada’s economy “did marginally better than we expected in the closing months of the second quarter,” while adding that the performance is not strong when measured by per capita output. Shenfeld indicated the latest data will likely prompt small upward adjustments to Q2 forecasts, but not enough to eliminate the rationale for additional policy easing tied to inflation developments.
The GDP update arrives shortly after the Bank of Canada cut its key policy rate for the second consecutive meeting. Governor Tiff Macklem has said the decision to lower the policy rate was influenced in part by weaker economic conditions and the need for growth to pick up.
Labour market is challenging, especially for newcomers and grads
While Canada has avoided a formal recession, growth remains subdued and the labour market reflects mounting strain. The combination of slower economic activity and elevated borrowing costs has made it harder for some groups—particularly recent graduates and newcomers to Canada—to find job opportunities.
Unemployment has risen over the past year, reaching 6.4% in June. Although recent interest-rate cuts by the Bank of Canada are intended to ease financial conditions and help stimulate demand, the central bank’s benchmark rate remains at 4.5%, a level that continues to exert a restraining influence on investment and hiring decisions.
Will we see a third interest rate cut?
Many forecasters now expect the Bank of Canada to follow up with another interest-rate reduction in September. RBC economist Abbey Xu, for example, observed that the prevailing economic backdrop should give the central bank room to deliver an additional cut at its September meeting.
The Bank of Canada was the first central bank among G7 nations to begin lowering interest rates this year, a move designed to support an economy that is growing but not accelerating fast enough to offset previous tightening. Future rate decisions will remain closely tied to incoming inflation readings and signs of recovery in job growth and consumer spending.
More about the economy:
- Canada’s inflation rate—and what it means for your investments
- What high inflation means for retirement savings
- How rising food costs are changing grocery shopping habits
- Understanding the Bank of Canada’s interest rate