Canada’s economy likely to decline by 0.2 per cent in June - GulfToday

Canada’s economy likely to decline by 0.2 per cent in June

People shop at the Eaton Centre in Toronto, Ontario. Reuters

People shop at the Eaton Centre in Toronto, Ontario. Reuters

Canada’s economy grew by 0.3 per cent in May, in line with expectations, as demand for services overshadowed the impact of raging wildfires on the energy sector, Statistics Canada data showed on Friday.

Analysts polled by Reuters had forecast a 0.3 per cent month-over-month rise in May.

April GDP was upwardly revised to 0.1 per cent growth from an initial report of zero growth.

The gross domestic product (GDP) however was expected to decline by 0.2 per cent in June, indicating an annualised growth rate of 1 per cent in the second quarter, Statscan said in a flash estimate.

The Bank of Canada has forecast a 1.5 per cent annualised GDP rise in the quarter ended June.

The central bank said earlier in July that pent-up demand for services and a tight labour market were among factors driving the economy, as it raised its GDP growth forecast for this year.

A rebound in wholesale and public administration as well as gains in manufacturing and real estate sectors helped drive economic growth in May, Statscan said.

Manufacturing posted its largest gain since October 2021, with both durable non-durable goods manufacturing increasing.

Those gains helped to more-than offset the largest decline in the energy sector since August 2020. Canada’s energy sector was severely impacted by raging wildfires in the main oil-producing province of Alberta and experienced broad declines.

Oil and gas extraction, excluding oil sands, dropped 6.6 per cent as a result of the forest fires in Alberta, Statscan said.

Overall, Canada’s service-producing sectors expanded 0.5 per cent in May, while the goods-producing sector posted a 0.3 per cent contraction.

The Canadian dollar weakened against its broadly stronger US counterpart on Thursday but the move was limited as investors bet on similar interest rate paths for the Bank of Canada and the Federal Reserve.

The dollar rose against a basket of major currencies after better-than-expected US economic data and a dovish European Central Bank forced investors to reconsider the assumption that the Fed will pause interest-rate hikes.

“It’s very hard for the CAD to get out from under the dollar’s shadow at the moment,” said Shaun Osborne, chief currency strategist at Scotiabank.

“The feeling is perhaps that the Fed and the Bank of Canada are on similar flight paths as far as interest rates go. Unless or until there is some sort of major break in that thinking in the market we probably will stay relatively rangebound.”

Money markets are pricing in a peak interest rate of about 5.25 per cent for the Bank of Canada over the coming months, not much less than the 5.42 per cent terminal rate that is priced in for the Fed. Canadian GDP data for May, due on Friday, could guide expectations for additional BoC rate hikes.

The Canadian dollar was trading 0.2 per cent lower at 1.3227 to the greenback, or 75.60 US cents, after moving in a range of 1.3159 to 1.3236. Other G10 currencies, with the exception of the yen, posted bigger declines.

“The Canadian dollar still looks cheap relative to where it should be,” Osborne said, pointing to recent convergence of Canadian and US yields, improved risk appetite and higher commodity prices.

The price of oil, one of Canada’s major exports, settled 1.7 per cent higher at $80.99 a barrel, after trading at its highest levels since April.

The Canadian 5-year yield touched its highest since December 2007 at 4.030 per cent before dipping to 4.019 per cent, up 13.9 basis points on the day.

Meanwhile the Bank of Canada discussed delaying a hike to its key overnight rate at the last meeting before deciding on a raise to ensure progress in dampening inflation did not stall, according to minutes published on Wednesday.

The bank announced a 25 basis point increase in rates to a 22-year-high of 5.0 per cent on July 12. It also lifted its 2023 growth forecast and pushed back by six months to mid-2025 its expectations for getting inflation to its 2 per cent target.

Governor Tiff Macklem said at the time that the Bank of Canada (BoC) would base future policy decisions - the next one is due Sept 6 - on incoming data and the outlook for inflation.

According to the summary of deliberations, or minutes, the six governing council members discussed “whether it was appropriate to raise the rate in July or wait for more evidence”.

The consensus was that “the cost of delaying action was larger than the benefit of waiting,” the BoC said.

The governing council members also agreed they were prepared to raise rates further “if inflation pressures did not ease as projected and progress toward the 2 per cent target stalled. But they did not want to do more than they had to.”

Many analysts are beginning to bet that the overnight rate will not go up any further.

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