A Bundle of Economic News!

September 13, 2023 - Statistics Canada released June 2023 and Q2 GDP "growth" rates on September 1 - both showed declines. Q2 GDP fell by an annualized 0.2% afer showing an unexpectedly high 3.1% growth in Q1. June 2023 GDP was down 0.2% compared to May, indicating a potential slowing of the economy. The July forecast is for the economy to remain "essentially unchanged". For those of you keeping score, this would be the third month of the past four with no change or an actual decline in GDP.

For the quarter, the decline can be attributed to a contraction in housing investment (-2.1% compared to Q1), smaller inventory accumulation, slower international exports (+0.1% compared to Q1), and a fall in household spending (+0.1% compared to +1.2% in Q1). Investment in non-residential structures rose by 2.4% in Q2, but that was primarily due to increased spending on engineering structures (+3.3%). GDP was dragged down by the CRA strike in April and widespread forest fires in June, among other factors.

June GDP fell by 0.2% compared to May, with 12 of 20 industrial sectors posting decreases. Wholesale trade contracted by 3.0% in June and was the largest contributor to June's decline. Non-residential building construction was down by 1.4%, as construction of commercial, public and industrial buildings fell for a second month in a row. The bright spot in non-residential construction was engineering construction, which grew by 0.5%.

August unemployment was unchanged at 5.5%, after posting increases in May, June and July. August job creation was 40,000 compared with a loss of 6,000 jobs in July. The jobs created in August were offset by a population increase. August average hourly wages were up 4.9% compared to a year earlier.

July headline inflation was 3.3% year-over-year (vs. 2.8% in June), driven by higher energy prices. CPI trim and medium (the Bank of Canada's (BoC) preferred measures of inflation) averaged 3.5% in July (vs. June's 3.9%). The BoC's target range for inflation is 1% to 3%, so clearly there is some distance to travel to be within that range, never mind hitting the 2% "ideal" target.

Against this backdrop, the BoC held the policy interest rate at 5% in September. However, the Bank noted "Governing Council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed". The big question is whether the recent softening trend in the economy, combined with the an apparently growing unemployment rate (up by 0.5% in the May to July period), will be enough to reduce inflation to acceptable levels without the BoC boosting interest rates. It's worth noting that the effect of increased interest rates on CPI is typically felt over six to eight quarters, and we have only seen economic results for five quarters since the Bank began the cycle of rate increases in March 2022, so they may only be beginning to bite.