Canada’s economic activity accelerates unexpectedly

The economy grew 0.1 percent in July, against a forecast for a 0.1 percent decline, but inflation persists.

Canada’s economic activity unexpectedly rose in July, the data show, while gross domestic product (GDP) in August likely held steady, with the surprise gain unlikely to change much for the central bank.

The Canadian economy grew 0.1 percent in July, compared with analysts’ forecast for a 0.1 percent decline, data from Statistics Canada showed on Thursday. Growth in goods-producing industries more than offset the first decline in service-producing industries since January.

“The economy did better than anticipated this summer, but there was still not much to write home about,” Royce Mendes, chief macro strategist at Desjardins Group, said in a note.

The slight gain in July and the likely lack of growth in August suggest annualized third-quarter GDP growth of about 1 percent, well below the most recent Bank of Canada forecast of 2.0 percent, analysts said.

“After a strong first half of the year, momentum appears to be slowing as multi-decade high inflation and rapidly rising interest rates weigh on the economy,” said Benjamin Reitzes, Canadian macroeconomic and rate strategist at BMO. Economics, in a note.

The Bank of Canada raised rates by 75 basis points to 3.25 percent earlier this month to combat inflation, which started to cool slightly in July but is still at levels not seen in nearly 40 years.

July GDP data showed that tar sands mining drove growth, jumping 5.1 percent on higher output, with crop production also helping, up 7.2 percent, mainly on volumes of wheat and other grains.

Demand for Canadian wheat has increased since Russia’s invasion of Ukraine on February 24, which Moscow is calling a special military operation, has helped boost export volumes.

But Canada’s retail trade sector contracted sharply in July, falling to its lowest level since December 2021, pushed by a 7.1 per cent decline in output at gas stations, Statscan said, though that was likely to be reversed in August.

Lodging and food services also contracted in July, driven by lower activity in bars and restaurants.

Strong inflation meant the Bank of Canada was likely to raise interest rates in its next decision in late October, but then the game may change, economists said.

“The slowdown in economic momentum is why we see the Bank of Canada only raising rates one more time in October,” Mendes said. Money markets are betting on a hike in October, with one more in December or January to bring the central bank’s policy rate to 4.00 percent.