What economists say about Canada’s GDP numbers — and a possible recession

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New gross domestic product numbers out Friday showed that Canada’s economy continues to defy talk of recession — but most economists don’t expect that to last.

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Growth stalled in May with a reading of 0.0 per cent, but beat market expectations and Statistics Canada’s earlier flash estimate for May of a month-over-month drop of 0.2 per cent. Looking ahead, the national data agency estimates the economy grew 0.1 per cent in June, putting quarterly annualized GDP on track for a 4.6 per cent reading in the second quarter, up from 3.1 per cent in the first quarter.

“It’s hard to get excited by no growth in May and 0.1 per cent in June,” Scotiabank’s Derek Holt said in a note to investors.

What appears to be “slowing growth” won’t deter the Bank of Canada from pursuing its aggressive interest-rate hiking campaign, economists said, as the BoC plays catch-up with runaway inflation.

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Here is what the economists have to say about Friday’s growth numbers and where they think they, and future interest rate hikes, are headed.

Randall Bartlett, senior director of Canadian Economics

“… The May number and June flash did reinforce our view that growth momentum is slowing very quickly going into the second half of 2022. Ongoing substantial interest rate hikes by the Bank of Canada are the primary cause. Indeed, the weakness can be increasingly chalked up to interest-rate sensitive sectors like housing, but it risks becoming broader than that. And while we don’t expect a recession starting in Q3, we’re of the view that there are broadly even odds of a recession in Canada next year.”

Carrie Freestone, economist, RBC Economics

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“Overall Q2 output growth tracking in line with our 4.5 per cent (annualized) forecast. Evidence continues to suggest that the Canadian economy is operating above long-run capacity limits. The unemployment rate remains extremely low, at 4.9 per cent. Labour market tightness persists, though early signs point to strength beginning to ease in the near term. Job postings data suggest fewer open positions listed in June and July. At the same time, we are seeing growth in consumer spending plateauing in June and July as inflation remains too high and the Bank of Canada continues to move along an aggressive hiking path. More interest rate hikes are still on the way to help further cool consumer demand and inflation pressures. We anticipate GDP growth will continue to slow towards the end of the year before outright declining in mid-2023.”

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Derek Holt, vice-president and head of Capital Markets Economics, Scotiabank

“Canada’s economy performed very well over 2022H1 but may be poised for a moderation into Q3. The way the GDP math works points to a loss of the running head start into Q3 compared to the early advantage that Q1 and Q2 GDP growth enjoyed. With huge cautions given that it’s a highly preliminary argument, it may be that the shine is about to come off Canadian GDP growth into the third quarter.”

Veronica Clark, economist, CITI Canada Economics

“GDP by industry was flat on the month in May, stronger than Citi and consensus expectations for a modest decline. Details of the report were not too surprising however with goods-producing industry output declining and services stronger. We would expect to see more of this dynamic over the summer months, although the impact of higher rates and two quarters of negative growth in the U.S. do make us more aware of upcoming downside risks for Canadian growth as well. However, with too-high inflation we continue to expect a 75bp hike by the BoC in September.”

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Andrew Hencic, senior economist, TD Economics

“With no growth in May and the +0.1 per cent m/m print for June, tracking for second quarter GDP growth is now 4.6 per cent (annualized). This is slightly better than the 4.4 per cent we anticipated earlier in the year in contrast to the declines observed stateside. However, in a sign that demand growth is responding to inflation and rising interest rates, momentum is slowing, with May and June showing little growth. Slowing growth shouldn’t deter the Bank of Canada (BoC) from continuing with its rate hiking cycle. Interest rate hikes were supposed to slow growth and intermittent contractions were always a possibility. As inflation remains well above target and the economy continues to operate in excess demand we expect the BoC to continue raising rates until they get to 3.25 per cent.”

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Andrew Grantham, economist, CIBC Economics

“While growth in the Canadian economy slowed towards the end of the second quarter, it appears that supply issues, specifically in the manufacturing and construction sector, were a bigger factor than a slowing in domestic demand. Weaker demand was still largely concentrated within the real estate sector, which was running at levels of activity well above pre-pandemic norms before interest rates started to rise. As such, the Bank of Canada is still expected to deliver a further, non-standard, rate hike at its next meeting. However, we expect that the impact on disposable incomes of high inflation and rising interest rates will start to show up more widely in economic data for the second half of the year, allowing the Bank of Canada to pause with rates just above three per cent.”

Financial Post