Economists expect the Bank of Canada to go ahead with another aggressive interest rate hike next week after the release of data showing the economy remained in relatively good shape during the second quarter. of the year.
The Canadian economy grew at an annual rate of 3.3% in the second quarter, Statistics Canada announced Wednesday in its latest report on real gross domestic product.
By comparison, the economy grew at an annual rate of 3.1% in the first quarter.
Although the 3.3% figure is lower than the agency’s preliminary estimate of 4.6%, BMO chief economist Douglas Porter said that in a typical year it would be considered above-average growth.
Tu Nguyen, an economist at accounting and advisory firm RSM Canada, said there were few surprises in the GDP data when broken down into its components.
“We are seeing pretty much what we expected, which is strong business investment, lots of household spending on services, which again is not surprising as the restrictions related to the pandemic have dropped,” Nguyen said. “And on the other hand, we’ve seen the housing sector not doing very well, which has been happening since the first interest rate hike in March.”
According to the federal agency, real GDP rose 0.8% in the second quarter, marking the fourth consecutive quarter of growth.
Statistics Canada also released its monthly report, which revealed that real GDP rose 0.1% in June after remaining flat in May.
Porter said the latest GDP data is a “mixed bag” as some sectors showed weakness while others were in good shape.
“I think that shows how volatile … this economy is. And, you know, it doesn’t lend itself to easy characterizations,” Porter said.
Wednesday’s report said companies increased their investment in inventory, which was the main contributor to growth. Businesses also increased their investment in engineering structures and machinery and equipment.
Meanwhile, household spending on semi-durable goods rose, fueled by increased spending on clothing and footwear as more people returned to the office.
At the same time, investment in housing fell in the second quarter, as did household spending on durable goods.
The Bank of Canada called the Canadian economy “overheated” and fought high inflation with a series of interest rate hikes.
The central bank hopes that higher borrowing rates will slow economic activity and bring inflation back to its 2% target.
With annual inflation hitting 7.6% in July, the Bank of Canada is expected to announce another outsized interest rate hike on September 7th.
Nguyen said the consensus among central bankers around the world was that inflation is widespread, meaning prices are rising rapidly across the economy, and therefore requires strong action on their part.
“I don’t see the Bank of Canada deviating from this strategy in the future. And I expect it to raise interest rates at every meeting for the remainder of the year,” he said. Nguyen.
BMO expects the central bank to raise its benchmark rate by three-quarters of a percentage point next week, but Porter said he wouldn’t be surprised if it opted for a more aggressive rate hike.
“I think in some ways the bank once wants to keep the market a bit on edge. And I think they also want to show that they plan to be very tough on inflation,” Porter said. .
Meanwhile, a first reading for July points to a contraction of 0.1%, with economists widely expecting an economic slowdown ahead.
How much Canadians feel the downturn will depend on their personal circumstances, Porter said, including the industry they work in and whether they are borrowers or savers.
Additionally, the Statistics Canada report showed wages rose 2% in the second quarter, with Ontario and Alberta contributing the most to the national increase. Statistics Canada said Atlantic province wage growth for the quarter was nearly double the national rate.
As household disposable income increased, their savings rate fell from 9.5% in the first quarter to 6.2%, mainly due to inflation. However, the savings rate remains well above pre-pandemic levels, which was 2.7% at the end of 2019. Although the report provides the overall savings rate, Statistics Canada noted that the rates savings tend to be higher among people in higher income brackets.
“While these estimates suggest continued resilience in net household savings, inflationary pressures on consumption and trends in employee compensation are likely to be key determinants of future results,” the agency said in its report.
This report from The Canadian Press was first published on August 31, 2022.