A surprise second-quarter contraction and a flat growth estimate for July suggests that the Bank of Canada has probably done enough to bring inflation to heel.
(Bloomberg) — A surprise second-quarter contraction and a flat growth estimate for July suggests that the Bank of Canada has probably done enough to bring inflation to heel.
Gross domestic product unexpectedly shrank at a 0.2% annualized pace last quarter, and economic growth at the beginning of the third didn’t look much stronger. While the contraction was partly due to wildfires and drought, household consumption was weak, suggesting aggressive increases to interest rates have already reined in spending by heavily indebted Canadians. First-quarter growth was revised downward.
“The economic landscape no longer looks like a soft landing is forthcoming. Instead, we could be looking at a mild to moderate recession if the demand slowdown continues,” Jay Zhao-Murray, an analyst at Monex Canada, said Friday by email. “For the Bank of Canada, the calculus surrounding the balance of risks will have swung sharply away from inflation to growth concerns.”
To be sure, with consumer price pressures still proving persistent, Governor Tiff Macklem and his officials are likely to maintain a hawkish stance when they announce their next rate move on Wednesday. “This does not necessarily mean cuts are on the table just yet, but hiking the policy rate would be unthinkable,” Zhao-Murray said.
With 475 basis points of monetary tightening since last March still working its way through the economy, Friday’s data prompted the only Canadian lender that was forecasting a hike next week to flip its call.
“The Bank of Canada’s impatience in July had us believing that it would carry on with yet another intemperate hike in September,” Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce, said in a report to investors. “But data in the past week has tipped the scales enough that we expect the BOC to do the right thing, and opt to pause next week.”
Shenfeld has now joined the majority of economists in a Bloomberg survey in predicting Macklem will hold the overnight rate at 5% on Sept. 6. Traders in overnight swaps markets, meanwhile, pared the odds of a hike to about one in 10 from just under a quarter before the GDP report was released.
–With assistance from Erik Hertzberg.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.