BoC rate cut unlikely after August GDP bump

Statistics Canada says the economy grew by 0.2% in August, helped by the resource sector. The reading showed a third consecutive month of growth and matched Thomson Reuters’ consensus expectations of economists.

The report on August’s growth came as the July figure was revised lower to show an increase of 0.4% compared with an initial reading of 0.5% for the month.

Goods-producing industries grew 0.7% in August, boosted by the mining, quarrying and oil and gas extraction sector which gained 1.4%.

The utilities sector rose 2.4% driven by demand for electricity, particularly in Ontario, due to August heatwaves.

Service-producing industries were essentially unchanged for the month.

Industry reaction

In a research note, CIBC economist Avery Shenfeld says August GDP provides “more evidence that Canada was en route to a hefty third quarter.” But, he adds, “let’s not forget that this came after a drop in Q2 that still leaves the year tracking at a mediocre 1.3% 12-month pace.”

But, says Shenfeld, “[this] leaves the quarter tracking a bit over 3% growth and therefore right in line with the Bank of Canada’s latest forecast. […] The one surprise was a drop in financial services.”

Brian DePratto, TD economist, is toeing the same line when it comes to Bank of Canada predictions. He says in a note, “We expect no action from the BoC in the foreseeable future, and today’s GDP report reinforces this view. The bar to any move remains high, and it will likely take a string of negative [or positive] surprises to stir any policy interest rate move from the Bank.”

He’s also positive on future growth, saying, “The August data […] provide[s] a preview of sorts of what is likely in store […]: a modest pace of activity consistent with only gradual absorption of economic slack. Perhaps unexciting, this would be a welcome change from the slow and fairly uneven pace of growth that has been typical of the past 18 months.”

Nonetheless, any negative surprises could push the BoC, says RBC in an economic update release. The bank says, “Recent comments by BoC Governor Poloz make clear that any downward surprises on growth could prompt a central bank response, including the potential for a cut in the overnight rate.”

On October 19, the BoC stood pat on rates while also downgrading its outlook for growth. The Bank’s next rate announcement will be made on December 7th, a week before the Fed’s final 2016 annoucement on December 14th, during which a rate hike is expected.

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