In July, Canada’s economy posted modest growth, with real GDP edging up by just 0.2 percent, according to Statistics Canada. This tepid increase followed a flat performance in June and marks the third month of little to no growth in the last six months. While certain sectors, including retail trade, public administration, and finance, saw gains, widespread wildfires in Western Canada had a significant negative impact on key industries like transportation, tourism, and mining.
The subdued economic performance has heightened speculation that the Bank of Canada (BoC) may cut interest rates more aggressively at its next meeting on October 23, 2024. With economists now predicting an annualized GDP growth rate of just 1 percent for the third quarter—well below the central bank’s forecast of 2.8 percent—the likelihood of a substantial rate cut has increased. A potential half-percentage point cut is being anticipated as the BoC looks to stimulate a sluggish economy.
Bank of Canada Governor Tiff Macklem has repeatedly stressed the need for faster economic expansion to meet growth targets. With the economy struggling to gain momentum and inflationary pressures still a concern, Macklem has raised the possibility of deeper rate cuts to boost economic activity.
Sector-by-Sector Breakdown: Growth and Struggles
July’s modest economic growth was driven primarily by the services-producing industries, which grew by 0.2 percent, and goods-producing industries, which saw a 0.1 percent increase. Leading the way was the retail trade sector, which posted a robust 1.0 percent growth, marking its second consecutive monthly increase. Motor vehicle and parts dealers were a key contributor to this sector’s success, with a 2.8 percent rise in sales at new car dealerships offsetting previous declines. However, growth in retail was tempered by a 1.8 percent contraction at gasoline stations.
The public sector continued its steady upward trajectory, expanding by 0.3 percent in July. Public administration, which grew by 0.4 percent, was the largest driver of this growth, marking its third consecutive monthly increase. Health care and social assistance, along with educational services, also contributed positively, each growing by 0.2 percent.
The finance and insurance sector demonstrated solid performance, increasing by 0.5 percent, largely fueled by gains in financial investment services, mutual funds, and market activity. This marked the second consecutive month of growth for the sector, as heightened market volatility due to interest rate adjustments and geopolitical instability spurred increased activity. Banking and mortgage services also grew by 0.3 percent, reflecting rising levels of debt in both mortgage and non-mortgage categories.
In the goods-producing industries, the utilities sector saw a significant 1.3 percent rise, driven by a 1.0 percent increase in electricity generation, transmission, and distribution. Warmer-than-usual weather in parts of Western Canada led to higher electricity demand for cooling, while natural gas distribution soared by 3.9 percent, thanks to increased industrial use.
Wildfires and Sectoral Declines
Despite these gains, several sectors were negatively impacted by the devastating wildfires that swept across parts of Western Canada in July. The transportation and warehousing sector contracted by 0.4 percent for the second consecutive month, with rail transportation plunging 4.6 percent due to suspensions in Jasper National Park, which disrupted rail freight movements. Similarly, accommodation services suffered a 2.0 percent decline as wildfires hampered tourism in key regions, including RV parks, camps, and rooming houses.
The construction sector also faced challenges, shrinking by 0.4 percent in July. Non-residential building construction was particularly hard-hit, with a 1.7 percent decline, continuing the sector’s downward trend from the previous month.
The mining sector experienced mixed results. While iron ore mining plummeted by 4.8 percent due to mine closures caused by the wildfires in Labrador and Northern Quebec, other parts of the mining industry saw growth. The mining and quarrying (excluding oil and gas) subsector grew by 0.4 percent, supported by a 7.1 percent rise in copper, nickel, lead, and zinc mining following the end of a labor strike in British Columbia.
Market Reactions and the Potential for Deeper Rate Cuts
The economic data has triggered market speculation that the Bank of Canada may take a more aggressive approach to interest rate cuts to spur economic growth. Economists are now bracing for a possible half-percentage point cut during the BoC’s upcoming policy meeting. If enacted, this would mark a shift toward more aggressive monetary easing, as the central bank grapples with balancing sluggish growth, inflation management, and a volatile global economy.
While 13 out of 20 sectors showed positive growth in July, the overall flatness of the economy is raising concerns about Canada’s economic resilience in the face of both external and internal challenges. Governor Macklem and the BoC will likely continue to focus on stimulating growth while maintaining inflationary pressures within manageable limits.
As the country prepares for the next monetary policy announcement, the lingering effects of the wildfires, geopolitical tensions, and the uncertain global economic outlook are expected to weigh heavily on decision-making. The possibility of deeper rate cuts is now on the horizon as the BoC seeks to navigate these turbulent economic waters.
In the meantime, all eyes will be on the next batch of economic data as it becomes clearer whether Canada’s economy can gain traction or if further monetary intervention will be required to fuel a more robust recovery.
