The Economy Is On Fire (Sort Of)

July 28, 2023 - Statistics Canada today released its May GDP growth figures, showing the economy is still hot - in more ways than one. The economy grew by 0.3% in the month, due to increases in the services sector; the goods-producing industrial secors posted declines. Growth was driven by upticks in wholesale trade (+2.9%), public administration (+0.6%), manufacturing (+1.6%), real estate (chiefly agents and brokers), and rental and leasing (a combined 0.5%).

The big loser was the energy sector (-2.1%), which was driven lower primarily by Alberta wildfires in May - the wrong kind of "hot", in terms of economic impact. Absent the wildfires, GDP growth in the month would have been higher. Non-residential construction also fell, by 1.3% in the month, partly offsetting April's growth. Construction overall was down by 0.8%, primarily driven by a 1.8% decline in residential construction.

At the same time, StatsCan provided an advance estimate for June and Q2 growth. The expectation is that real GDP will decline 0.2% in June compared to May. This is driven by a decrease in the wholesale trade and manufacturing sectors. Oil and gas extraction, down 6.6% in May, are expected to recover some of that ground. For Q2, StatsCan is estimating 0.3% growth over Q1; this is equal to an annualized rate of 1.2% - still hot, but cooling when compared to Q1's 3.4% increase.

It remains to be seen what effect this will have on the Bank of Canada's course regarding its benchmark rate. The headline CPI in June was just below the top of the Bank's target range, but underlying inflation remains stubbornly high. Will the cooling economy be enough to bring that underlying inflation down over the next four to six months? And can the economy cool without going into recession? We are cautiously optimistic that CPI will return to the target range by mid-2025 (the Bank's own projection) and that we can avoid a recession (although this is an even more cautious optimism). If those things happen, we can expect the Bank to stay on the sidelines and leave the benchmark rate at its current 5.0%.

The StatsCan report is available here.