(Bloomberg) -- Canada’s economy grew more than expected in the second quarter, but falling per-capita gross domestic product and softening household consumption should keep the Bank of Canada on track to cut rates for a third straight meeting next week.
The country’s GDP rose 2.1% on an annualized basis from April through June, beating the median estimate of 1.8% in a Bloomberg survey of economists and the central bank’s forecast of 1.5%. That’s up from 1.8% in the first quarter and represents the fastest growth since the first quarter of 2023.
Preliminary data suggest momentum stalled heading into the third quarter with a flat reading in July, Statistics Canada reported Friday. That followed similarly flat monthly growth in June, below the consensus estimate of 0.1%.
Overall, the report points to an economy that grew solidly in the first half of the year, largely because of population growth. That’s likely to help the country avoid a recession. Still, households are feeling the pinch from high borrowing costs.
Bond yields rose, pushing the two-year Canada benchmark yield to 3.33%. The loonie extended gains to C$1.349 per US dollar, on pace to cap its best month this year, as of 9:04 a.m. in Ottawa.
US data released at the same time showed the Federal Reserve’s preferred measure of underlying US inflation rose at a mild pace and household spending picked up in July, reinforcing policymakers’ plan to start cutting interest rates next month.
The Bank of Canada lowered its policy rate by 25 basis points at both its June and July meetings, bringing it to 4.5%. Economists and markets widely expect officials to deliver another standard-sized cut on Sept. 4.
The primary drivers of the growing economy in the second quarter were government spending, which jumped 11% on an annualized basis, and total investment excluding inventories, which rose 3.5%. Government spending rose on higher wages.
Household spending eased to 0.6% annualized in the second quarter after growing by more than 3% in the previous two quarters. Per capita GDP fell for the fifth straight quarter.
“Weak momentum heading into the third quarter gives ample reason for the Bank of Canada to continue cutting interest rates,” said Andrew Grantham, an economist at Canadian Imperial Bank of Commerce, adding that the fact government spending drove growth “wasn’t particularly impressive.”
The report is “unlikely to have a major impact on the Bank of Canada’s rate decision next week,” said Charles St-Arnaud, chief economist at Alberta Central. He sees the bank cutting by 25 basis points at the remaining three meetings this year.
Andrew DiCapua, an economist at the Canadian Chamber of Commerce, was also unimpressed by the composition of growth, but noted that improving business investment was a “positive note.”
What Bloomberg Economics Says...
“We think the Bank of Canada will read through the upside surprise in headline GDP growth, focusing instead on weakness under the surface and cutting rates by another 25 basis points at the Governing Council’s Sept. 4 meeting.”
— Stuart Paul, US and Canada economist
Read the full report here.
In June, goods-producing industries continued to show signs of weakness. The sector contracted by 0.4% that month, led lower by manufacturing. That was offset by 0.1% growth in the larger services sector.
Statistics Canada said its early estimate for July was based on the construction, mining, oil and gas and wholesale trade sectors recording decreases while the finance and insurance and retail trade observed increases.
Flat growth in June and July makes the Bank of Canada’s 2.8% forecast for the third quarter “almost unachievable,” said Benjamin Reitzes, rates and macro strategist at Bank of Montreal.
“No matter how you slice it, the Canadian economy is struggling.”
--With assistance from Carter Johnson, Erik Hertzberg and Jay Zhao-Murray.
(Adds economist reaction, updates market reaction starting in paragraph five.)
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