(Bloomberg) -- The Canadian economy likely expanded faster than forecasts in the second quarter, giving the central bank room to adjust the pace of rate cuts.
Gross domestic product is on track to grow at an annualized pace of 2.2%, according to Statistics Canada’s estimate Wednesday. That’s stronger than the Bank of Canada’s and economists’ forecasts of 1.5%, and is an acceleration from 1.7% between January and March.
The data point to Canada’s economy expanding 1.3% in the first half of the year, the fastest six-month period of growth since August 2022. Still, preliminary data suggest June output grew 0.1%, indicating weakening momentum following a 0.2% expansion in May and 0.3% in April.
The report was released at the same time as data in the US showed companies added the fewest number of workers since the start of the year and wage growth slowed. Yields on Canada’s two-year government bonds rose about a basis point on the day to 3.501%, while the loonie fell 0.3% to C$1.381 per US dollar as of 10:20 a.m. in Ottawa.
Taken together with Canada’s rapid population growth due to strong immigration, Wednesday’s report shows an economy that’s still in excess supply and growing below its potential, which will continue to help cool price pressures as the Bank of Canada further reduces the restrictiveness of monetary policy.
While quarterly growth picked up, data showed weakness in household spending as high interest rates weigh on consumers. Retail trade was the largest detractor to growth in May, contracting 0.9% and more than offsetting the increase in the previous month. Wholesale trade also fell.\
Manufacturing led the growth in May, with over half of the increase stemming from petroleum and coal products. That subsector rose 7.3%, its largest increase since June 2021.
The crude oil and other pipeline transportation industry rose 1.5%, reflecting in part the opening of the expanded Trans Mountain pipeline carrying Alberta crude to the British Columbia coast for shipment.
Overall, supply-side drivers appear to be leading the growth in Canada in recent months. The added capacity may allow for more non-inflationary growth.
“GDP per capita is still expected to decline,” Charles St-Arnaud, chief economist at Alberta Central, said in an email. “Growth is expected to remain lackluster for the rest of the year, supported in part by strong population growth, as individual consumers continue to constrain their spending.”
Last week, Governor Tiff Macklem and his officials cut interest rates by 25 basis points for a second consecutive meeting. They also put more weight on preserving a soft landing for the economy and guarding against risks that inflation could undershoot the 2% target.
The Bank of Canada next sets rates on Sept. 4, following the statistics agency’s release of official second-quarter output data on Aug. 30. The country’s biggest lenders are split on whether policymakers will cut borrowing costs for a third straight meeting or wait until October.
“All told, this number should put the rumblings of the Bank of Canada potentially looking at a 50 basis-point cut to bed for now,” Benjamin Reitzes, rates and macro strategist at Bank of Montreal, said in an email. “We’d need to see extremely weak data going forward for that to be at all considered.”
The data won’t stand in the way of a further rate cut in September, which will be more more tied to progress in inflation, said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, in a report to investors.
Royce Mendes, managing director of macro strategy at Desjardins Securities, also said the report should not derail a September cut as he pointed to the weakness in per-capita output.
“The latest GDP report provided slightly better news than economists were expecting, but it won’t be enough to assuage the Bank of Canada’s concerns about downside risks to the economy.”
--With assistance from Erik Hertzberg.
(Updates market reaction in paragraph four, adds more economist comments.)
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