Canada GDP Rises 0.3% in April -- 2nd Update

By Robb M. Stewart

OTTAWA--Canada's economy looks to have lost momentum again after a rebound in April, pointing to a soft backdrop that could help keep inflationary pressures in check and leave the door open to further rate cuts this year.

Preliminary data suggest gross domestic product, a broad measure of goods and services produced across the economy, rose 0.1% in May from the month before, Statistics Canada said Friday.

That follows April's 0.3% expansion in GDP by industry to 2.225 trillion Canadian dollars, the equivalent of US$1.624 trillion, which was in line with the advance previously projected by the data agency and the consensus forecast of economists. Compared with a year earlier, GDP increased 1.1%.

With the latest numbers, economists estimate growth is tracking at an annualized 1.8% pace in the current quarter. That is roughly in line with the 1.7% expansion in the first three months of 2024 and slightly stronger than the 1.5% growth projected by the central bank, though its forecasts are set to be revised when policymakers sit down to decide on rates late next month. Still, given rapid growth in the population over the last year, the pace looks lackluster on a per-capita basis and, for economists, points to continued excess supply in the economy that would mean Canada can grow without adding to inflation triggers.

Whether that is enough for the Bank of Canada to cut interest rates a second time in July may come down to jobs and inflation data due out before the call is made.

"Growth is still a bit below potential, which likely means some further back-up in the unemployment rate and some further moderation in underlying inflation. As long as the latter holds true, more rate cuts are coming," said Bank of Montreal chief economist Douglas Porter, who anticipates the next drop in rates will be in September.

The estimate for May, which will be updated at the end of next month, shows increased output in manufacturing, real estate and rental and leasing, and finance and insurance were partially countered by weakness in retail and wholesale trade.

Growth the month before was broad but helped by recoveries in a number of industries, including natural resources as well as wholesale and retail.

After stalling in the middle of last year, Canada's economy resumed growth in the first quarter of 2024 thanks to strong immigration and a recovery in household spending. Yet after a strong start to the year, growth by industry has moderated since January and was essentially flat in April.

Earlier this month, the Bank of Canada became the first Group of Seven central bank to offer rate relief with a cut to a policy interest rate that had been left at a more than two-decade high for almost a year. Economists anticipate further cuts this year, though the odds lengthened on a cut next month after a surprise acceleration in inflation in May.

"The slowing in May GDP growth suggests that the reacceleration in inflation during that same month likely reflected supply issues or volatility in the data, rather than demand pressures, and a follow up interest rate cut at the July meeting is still possible if core inflationary pressures cool again next month," Andrew Grantham, senior economist at CIBC Capital Markets, said.

Statistics Canada's advance estimates of receipts point to a 0.6% drop in retail sales in May from the month before and a 0.9% decline in monthly wholesale sales, though a 0.2% rise in manufacturing shipments.

The latest GDP report showed growth in April in 15 of 20 industries tracked by the data agency, with strength in both goods- and services-producing segments.

Following two straight months of declines, retail trade for the month increased thanks to sales of food and drink and gasoline. Wholesale trade also expanded, more than offsetting a decline in March, due in part to the motor vehicle industry with a rise in manufacturing and increased imports of cars and light trucks.

Mining also rebounded in April, with increased metal ore and coal production, while Canada's oil sands sector helped drive a rise in oil and gas extraction, which has now climbed in six of the last seven months. However, construction activity declined in April after the strongest growth rate the month before since October 2022, with residential building dragged down by low levels of activity in new single and multi-unit family homes.

Canada's economy continues to expand with GDP up in four of five months and flat once. Still, growth in the second quarter would still leave per-capita output lower for a seventh quarter out of the last eight, says Royal Bank of Canada economist Claire Fan, who adds that interest rates even with more cuts expected this year will remain high enough to restrict growth for some time.

Write to Robb M. Stewart at [e-mail]

(END) Dow Jones Newswires

06-28-24 1122ET