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Canada’s economy grew in the second quarter, but momentum is slowing as the Bank of Canada’s aggressive interest-rate hikes take some of the heat out of the economy.
Statistics Canada estimates GDP shrank 0.1% in July
Canada’s economy grew in the second quarter, but momentum is slowing as the Bank of Canada’s aggressive interest-rate hikes take some of the heat out of the economy.
Gross domestic product (GDP) from April to June increased at an annual rate of 3.3 per cent, compared to 3.1 per cent for the first quarter of 2022, Statistics Canada said on Aug. 31. The agency’s monthly estimate for July showed a contraction of 0.1 per cent.
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The Bank of Canada in its July Monetary Policy Report last month forecast that output would grow by four per cent, while Bay Street economists expected the economy to grow by 4.4 per cent.
Statistics Canada’s data showed Canada’s economy expanded in the face of rising inflation, a tight labour market and excess demand. But its negative reading for July, along with forecasters’ missed estimate, indicate growth is waning and could further weaken in the last half of the year.
Still, output is higher than the central bank’s “potential” growth rate of two per cent, the threshold at which it believes the economy can expand without fuelling inflation.
“The Q2 GDP reading was likely the last ‘above-trend’ increase of this economic cycle. The bulk of GDP growth in Q2 came earlier in the quarter,” Nathan Janzen, assistant chief economist at Royal Bank of Canada, said in a note. “We continue to expect growth to be slower over the second half of the year with the economy slipping into a ‘moderate’ recession in 2023.”
Despite inflation being at levels not seen in decades, household spending was one of the biggest contributors to economic growth. In the second quarter, annualized expenditures rose 9.7 per cent amid increased spending on clothing and footwear. That’s partly because rising wages boosted household incomes. Overall disposable household income increased at a quarterly rate of one per cent.
The savings rate fell to 6.2 per cent, on a quarterly basis, from 9.5 per cent in the first quarter. But household net savings are still more than double what they were at the end of 2019. That, combined with rising incomes and an economy free from COVID-19 lockdown restrictions, led more people to travel and dine out.
Business investment also played a role. Amid strong consumer spending and high prices for commodities, more businesses stockpiled inventories, the biggest contributor to output at $47 billion. Demand for services, especially travel, helped bolster spending on machinery and equipment, up nearly 14 per cent on an annualized basis.
Nominal GDP, which doesn’t strip out inflation, rose close to 18 per cent, annualized, in the quarter.
“Recall that nominal GDP drives things like personal income, corporate profits and government revenues,” Bank of Montreal chief economist Douglas Porter said in a note. “For a Bank of Canada that is laser-focused on inflation, the moderate miss in real GDP is almost meaningless when nominal spending is barreling ahead … deep into double-digit terrain.”
A slowdown in other sectors of the economy indicate the central bank’s rate hikes are beginning to work. For example, annualized investment in the housing market dropped more than 27 per cent in the quarter.
Trade also dragged on growth, with imports up more than 30 per cent, annualized, while exports only grew at an annual rate of 11 per cent.
GDP expanded at a slower rate than forecasters expected, but the economy is still too heated for the Bank of Canada’s liking.
Governor Tiff Macklem kicked off an aggressive rate-tightening cycle in March to stamp out rapid price growth. Last month, the Governing Council issued a rare, 100-basis-point increase after the consumer price index reached 8.1 per cent in June. CPI receded to 7.6 per cent in July.
But we should expect more rate hikes. The central bank is “determined” to bring an end to high inflation and rebalance supply and demand, Macklem wrote in a column for the National Post. “We know our job is not done yet — it won’t be done until inflation gets back to the two-per-cent target.”
Markets expect the Bank of Canada to increase the interest rate by 75 basis points in September.
With July’s negative reading, economists are bracing for softer growth in the second half of the year.
“It now looks likely that GDP growth will slow to a little less than one per cent annualized this quarter, leaving it well below the bank’s forecast of two per cent,” Capital Economics senior economist Stephen Brown said by email.
“The bottom line is that the economy is slowing faster than most forecasters expected although, with the labour market still very tight and wage growth likely to accelerate, we doubt that this will be enough to stop the Bank of Canada from raising its policy rate by another one-per-cent point over the next two meetings.”
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OTTAWA – Statistics Canada says wholesale sales, excluding petroleum, petroleum products, and other hydrocarbons and excluding oilseed and grain, rose 0.4 per cent to $82.7 billion in July.
The increase came as sales in the miscellaneous subsector gained three per cent to reach $10.5 billion in July, helped by strength in the agriculture supplies industry group, which rose 9.2 per cent.
The food, beverage and tobacco subsector added 1.7 per cent to total $15 billion in July.
The personal and household goods subsector fell 2.5 per cent to $12.1 billion.
In volume terms, overall wholesale sales rose 0.5 per cent in July.
Statistics Canada started including oilseed and grain as well as the petroleum and petroleum products subsector as part of wholesale trade last year, but is excluding the data from monthly analysis until there is enough historical data.
This report by The Canadian Press was first published Sept. 13, 2024.
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VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
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NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
The Canadian Press. All rights reserved.
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