Analysts suggest this could prompt the central bank to consider more aggressive rate cuts in the near future, which would have widespread implications for borrowing costs and consumer spending.
Consensus estimates from major financial institutions, including BMO and Scotiabank, predict a 0.1 per cent increase in GDP for July, slightly higher than preliminary figures indicating no change. CIBC, Scotiabank, and BMO are more optimistic, forecasting a 0.2 per cent rise, while RBC maintains a conservative estimate of 0.1 per cent.
Even with a slight monthly increase, the overall economic growth for the third quarter is anticipated to remain well below the 2.8 per cent annualized growth rate projected by the Bank of Canada in its July Monetary Policy Report. CIBC economist Avery Shenfeld highlighted that even a better-than-expected July outcome would only result in a growth rate slightly above 1 per cent annually, which would provide ample justification for the central bank to consider cutting interest rates further.
Economists from RBC, Nathan Janzen and Abbey Xu, noted that a July increase, while positive, would still reflect a historically weak performance, leading to another decline in per-capita GDP for the quarter. This would mark the eighth decline in the past nine quarters. Their base-case scenario anticipates the Bank of Canada will implement rate cuts of 25 basis points at each meeting, though there is a growing possibility of more substantial reductions if economic conditions deteriorate.
Bank of Canada Governor Tiff Macklem emphasized that with inflation making progress—reaching the bank’s target of 2 per cent in August—further policy rate cuts seem reasonable. He acknowledged that while economic growth had improved in the first half of the year, recent indicators suggest it may not be as robust as previously expected, which could affect consumer and business confidence moving forward.
MO’s macro strategist Benjamin Reitzes has indicated that while it’s clear more rate cuts are imminent, the specifics regarding the extent and speed of these cuts remain uncertain. He noted that the forthcoming GDP report could solidify expectations for a 50 basis point cut in October.
As the Bank of Canada prepares for its next interest rate decision on October 23, financial markets currently reflect a greater than 58 per cent likelihood of a 50 basis point reduction, along with expectations for an additional 25 basis point cut at the final meeting of the year in December. The situation highlights a growing urgency for the central bank to respond to ongoing economic challenges while balancing inflationary pressures, which will be critical for shaping Canada’s economic landscape in the coming months.
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