Canada Q2 GDP to Rise 2.7%

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Canada will be releasing the GDP report for June alongside the full and final second quarter GDP data.

Based on recent data, it is widely expected that Canada’s second quarter GDP will rise by 2.7% – 2.8% during the quarter. This beats the Bank of Canada’s forecasts of a 2.3% increase on a quarterly basis.

On an annualized basis, the GDP growth rate is set to rise by 0.7%. This marks a giant leap from the 0.4% increase registered in the previous quarter ending March 2019. For the full year of 2019, the Bank of Canada has forecast a growth rate of 1.3%.

Canada’s economy got off to a weak start. In February, the economy contracted by 0.2%. But growth managed to pick up in the later months. The BoC had initially brushed aside the decline in the first quarter, calling it temporary.

Canada GDP
Canada GDP, m/m – May 2019

Officials remain optimistic that growth will return in the upcoming quarters.

Number of Factors Contributing to GDP Growth

Economic data over the past few weeks adds evidence to the expectations that growth picked up.

Firstly, the retail sales increased modestly. Nominal retail sales turned flat in June. But, when removing the price effects, real retail sales grew 0.4% on a month over month basis.

Contributing to the retail sales increase was the building materials. This sector advanced 5.7% on the month. Besides the building materials sector, clothing sales and sporting goods also rose strongly.

Excluding sales at gasoline stations and car dealerships, retail sales grew 1.7% on the month. This was the biggest jump since January 2017. However, analysts point out that the increase (such as clothing and sporting goods) was largely due to the NBA playoffs.

Canada Manufacturing Sales Decline Less Than Expected

Earlier last week, manufacturing sales report showed a 1.2% decline to $58 billion in June. This follows up on a 1.6% increase in the month of May.

The official data from Statistics Canada showed that sales in 16 of 21 industries fell. This represented mostly manufacturing sales. The gains in May were, however, largely due to one-time deals. Thus, the June data gives us a more realistic picture.

As with the global trend, the manufacturing sector is looking at an uncertain period. Still, the data, so far, is holding up. But the question remains whether this trend can be sustainable going forward.

For the second quarter, manufacturing sales managed to rise by 1.7%, only a small gain. Petroleum and coal industries are also under pressure.

Both the industries saw sales declining by 3.8% in June.

Bank of Canada to Remain on the Sidelines

While other central banks are moving to or have already shifted to an easing bias, it is a different story for the Bank of Canada. The increase in the second quarter GDP this year will see the data beating the BoC’s estimates by a comfortable margin.

The central bank has been holding interest rates steady since October 2018. While initially citing the threat of a trade war with the United States, the narrative shifted. The tussle between the US and China has engulfed the global economy.

As a result, trade and importantly, manufacturing, has seen a significant slowdown. The current economic outlook for Canada will likely give the Bank of Canada more breathing space compared to its peers.

But it will be interesting to see how long the BoC can buck the current monetary policy trend.

The central bank will be holding its next monetary policy meeting on the 4th of September. However, it is unlikely to make any major adjustments to interest rates. This puts the BoC on hold while the Fed and the ECB are slated to cut interest rates and restart the QE program respectively.

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