Economic Stagnation: August Slowdown Raises Alarms for Canada’s Economy
Canada’s economy demonstrated resilience in July, recording a 0.2% growth rate—double the forecasted 0.1% increase, according to Statistics Canada (Statscan) data released Friday. This positive movement was buoyed by gains in both retail trade and public sectors, even as the economy faced disruptions, including the impact of widespread wildfires across the country.
In light of the wildfires, which negatively affected various sectors, the July figures came as a pleasant surprise. The services-producing industries experienced a 0.2% rise, thanks largely to retail trade, as well as financial, insurance, and public sectors. Meanwhile, the goods-producing industries recorded a modest 0.1% growth, led by the utilities and manufacturing sectors, showing that despite certain challenges, the economy was still able to muster forward momentum.
However, preliminary estimates for August point to an economic halt, with the gross domestic product (GDP) remaining effectively unchanged. The reasons behind this stagnation include the offsetting forces within different sectors: growth in oil and gas extraction and the public sector were balanced out by contractions in manufacturing, transportation, and warehousing. This shift has raised alarms among economists and policymakers alike, suggesting that the economy may be losing its previous momentum.
Given the August data, the outlook for the third quarter has become more cautious. If GDP remains flat through September, the annualized growth for Q3 is expected to hover around 1%. This figure stands in stark contrast to the Bank of Canada’s (BoC) July forecast, which projected a 2.8% growth rate for the same period.
Despite three rate cuts since June—each by a quarter-percentage-point—the possibility of a larger-than-usual interest rate cut in October has been floated by analysts. The money markets are currently assigning a roughly 50% probability of a 50 basis-point cut in the bank’s upcoming policy announcement on October 23, indicating a keen anticipation that more aggressive policy measures might be necessary to stimulate growth.
Bank of Canada Governor Tiff Macklem recently hinted at further cuts to the benchmark interest rate, highlighting progress in curbing inflation
“It is reasonable to expect more rate cuts given the progress we have made in cooling inflation,” he said. This sentiment suggests that the central bank is closely watching for signs of economic stagnation and is prepared to take action should the outlook worsen.
The divergent performances of different sectors have been a defining characteristic of the Canadian economy in recent months. In July, the services sector was the engine of growth, with retail trade, public sector activity, and finance all experiencing gains. However, the negative impact of wildfires notably affected transportation, warehousing, and accommodation services, which dampened growth in the sector.
Similarly, the goods-producing sector was not uniform in its performance. While utilities and manufacturing saw gains, the effects were modest. As of August, manufacturing began showing signs of contraction, along with transportation and warehousing, reversing some of the gains made earlier in the summer. The stagnation of the GDP in August reflects a balancing act, where gains in some areas were effectively erased by losses in others.
Information for this briefing was found via CTV and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
