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Having flatlined in March, Canada’s economy returned to growth in April, with both the manufacturing and services sectors expanding 0.3% on the month.
While the data didn’t surprise expectations as it landed in-line with Statistics Canada’s advance estimate, it does leave the economy on track to exceed the Bank’s Q2 growth forecast barring any significant backslide, especially if the advance estimate for May of 0.1% MoM turns out to be correct again. While this adds further credence to the argument that the Bank should remain cautious in its policy stance as the Canadian economy is seen reaccelerating, we remain sceptical. Assuming again that StatCan’s estimate of May’s GDP is correct, the Canadian economy would be tracking at just 1.53% QoQ annualised in the three months up to May, significantly undershooting its updated estimate of potential at 2.5%.
Moreover, we think that the resurgence in inflation pressures in May weren’t as a result of improving demand conditions, but instead temporary factors that should snap back in June, while the labour market continues to exhibit significant levels of slack across multiple measures.
We think the Bank of Canada will see the wood for the trees in July, focusing on the broader macroeconomic environment and cutting as a result. However, the BoC’s tendency to base policy on realised growth data as opposed to forecasted rates means today’s data does raise the risk that the Bank pauses in July, noting that stronger growth outturns allow for a more prudent approach.
While the risk of a pause is negligible in our view, it is rising with each data point that clouds the overall macroeconomic outlook. If this trend is repeated in the next jobs and inflation reports, data uncertainty alone could tip the BoC into holding.
Looking at the GDP data in more depth, rebounds in wholesale trade (+2.0% MoM, +0.101pp contribution), mining and oil and gas (+1.8%, +0.076pp), and manufacturing (+0.4%, +0.035pp) contributed the most to overall growth, having all declined in the month prior. Retail sales (+0.5%, +0.028pp) also positively contributed, led by food and beverage retailers, and gasoline stations which rebounded from declines in the previous months. While growth was broad-based, there is reason to suggest that its recent strength is unsustainable, however, as suggested by StatCan’s preliminary estimate of a cooler growth rate of 0.1% MoM in May. In wholesale trade, the largest increase came in motor vehicle and accessories wholesaling, which rose the most since October 2021. At a time when consumer confidence remains subdued, this should mean revert next month, with StatCan forecasting this component to negatively contribute to growth in May. Moreover, strength in retailing and recreational spending also look anomalous, given ongoing anecdotal reports that consumer demand remains weak, and data showing that employment levels in consumer-discretionary industries have yet to return to pre-pandemic averages.
As a result, we expect the Canadian economy to cool in May and June, although the strong start to the quarter may see growth overshoot the BoC’s estimates of 1.5% QoQ annualised. This should be viewed in the context of the economy underperforming the Bank’s estimates in the first quarter and continuing to grow at a below potential rate, not as a risk in terms of inflation persistence.
Author:
Simon Harvey, Head of FX Analysis