BoC expected to cut key interest rate, despite stronger-than-anticipated growth in Q2

OTTAWA — Economists say the Bank of Canada is still on track to cut interest rates next week, despite economic growth coming in stronger than expected in the second quarter.

Statistics Canada said on Friday the economy grew at an annualized rate of 2.1 per cent in the second quarter — beating the Bank of Canada’s forecast.

But real gross domestic product continued to shrink on a per-person basis, marking the fifth consecutive decline. Economists typically look at GDP per capita to assess the standard of living.

Overall economic growth also halted toward the end of the quarter as real gross domestic product was essentially unchanged for June. A preliminary estimate suggested the economy remained flat in July as well.

“Growth in the Canadian economy was modestly better than expected in Q2, but weak momentum heading into the third quarter gives ample reason for the BoC to continue cutting interest rates,” CIBC senior economist Andrew Grantham said in a client note.

The Bank of Canada’s next interest rate decision is set for Wednesday.

Economists are widely expecting the central bank to lower its key policy rate by a quarter of a percentage point, which would mark its third consecutive rate cut. The central bank’s key interest rate currently stands at 4.5 per cent.

Governor Tiff Macklem said at the last interest rate announcement that the central bank was cutting interest rates in part to help the economy bounce back.

If inflation continued to slow, he said it would be reasonable to expect the Bank of Canada to continue lowering its policy rate.

Although high interest rates have not pushed the economy into a recession, economic growth continues to lag strong population growth.

The latest GDP report also suggested that growth in the second quarter was largely driven by government spending, rather than a broad-based increase in activity.

Meanwhile, the economy posted declines in exports, residential construction and household spending on goods.

“When you look under the surface it really was quite a weak print for the second quarter, and teed up a lot of weakness, we think, for the third quarter as well,” said Randall Bartlett, senior director of Canadian economics at Desjardins.

“Given the weakness that we’re expecting for real GDP growth in Q3, coming in at roughly half the rate the (BoC) was forecasting, we think it just provides that much more support for the Bank of Canada to continue cutting rates.”

Many forecasters expect those rate cuts to continue throughout the fall.

The Bank of Canada is particularly concerned about weakness in the labour market as the unemployment rate keeps trending higher.

Canada’s unemployment rate was 6.4 per cent in July, with youth and recent immigrants disproportionately affected by the slowing job market.

High interest rates have also put a damper on household spending. With population growth outpacing consumption, per-capita household spending fell by 0.4 per cent in the second quarter.

Meanwhile, households were saving more in the second quarter as wages continued to increase rapidly.

“It seems like households are scaling back their spending in part because of high inflation and high interest rates, and also in preparation for upcoming mortgage renewals,” Bartlett said.

Despite the slowdown in the job market, wages continue to climb, rising 5.2 per cent in July on an annual basis.

At the same time, inflation has slowed significantly, reaching 2.5 per cent that month.

This report by The Canadian Press was first published Aug. 30, 2024.

Nojoud Al Mallees, The Canadian Press