OTTAWA–The Canadian economy experienced a boost in economic growth during the month of May, signaling a recovery after one of the largest strikes in the country’s history. However, recent estimates suggest that a contraction may occur in June due to weaknesses in wholesale trade and manufacturing sectors.
May’s economic strength was driven by a rebound in public administration as federal government workers returned to work after a strike over pay. Unfortunately, wildfires in western Canada had a negative impact on the energy sector, leading to production shutdowns and hindering overall growth.
Despite a strong start to the year, the Canadian economy has been experiencing only modest growth in recent months. The early estimate of a decline in gross domestic product (GDP) for June may provide some reassurance to the central bank. The bank has been closely monitoring the economy for indications that higher interest rates are curbing excessive demand and reducing inflationary pressures.
Statistics Canada reported that GDP, which measures the production of goods and services across the economy, increased by 0.3% to 2.091 trillion Canadian dollars (equivalent to $1.581 trillion USD) in May compared to the previous month. When compared to the same period last year, GDP grew by 1.9%.
The pace of industry-level activity was slightly lower than the initial flash estimate of a 0.4% monthly GDP advancement but still aligned with economists’ growth expectations. This follows three consecutive months of steady 0.1% monthly GDP growth following strong growth in January.
Early data indicates that the economy may experience a 0.2% decline in GDP in June, which would mark the first decrease since December.
If this June estimate holds true, the annualized first-quarter GDP growth is projected to be 1%, significantly cooler than the 2.7% increase observed during the first three months of the year. Total expenditure-based GDP also saw a 3.1% increase.
The Bank of Canada anticipates a slowdown in GDP growth as the effects of aggressive interest rate hikes over the past year continue to impact household spending and business investment. The central bank also expects inflation to remain around 3% over the next year, taking longer than initially anticipated to reach its 2% target.
Central Bank Raises Benchmark Policy Rate to 22-Year High
The central bank recently announced that it has increased its benchmark policy rate by a quarter point, reaching a 22-year high of 5%. This decision was made in response to the persistence of excess demand and underlying inflation. Factors contributing to this situation include tight labor markets, population growth, savings accumulated during the pandemic, and pent-up consumer demand.
While officials have expressed their willingness to further raise the policy rate if inflationary pressures do not ease as projected and progress toward the target slows, they also emphasize the importance of avoiding excessive measures. Despite a rebound in the housing market in Canada, annual inflation experienced a cooling effect in June, reaching a pace of 2.8%, the slowest in over two years. However, core measures of inflation remain sticky, and the jobless rate has risen for the second consecutive month, despite strong hiring efforts in June.
According to Statistics Canada’s GDP report, the services industries have outperformed the goods-producing sectors in May. The wholesale trade sector rebounded during this period, and manufacturing also experienced an upswing. Supply chain issues that arose during the pandemic have been gradually easing, contributing to these positive developments. Additionally, May witnessed substantial growth in the offices of real estate agents and brokers, driven by increased reselling activity in major markets across the country.
However, not all sectors experienced growth during this time. The energy industry saw its first decline in five months, with the largest drop since August 2020. This decline was mainly attributed to forest fires in Alberta and resulted in reduced oil and gas extraction. Moreover, residential construction also experienced a decrease.
Preliminary information suggests that both wholesale trade and manufacturing declined in June, reversing the gains made in May. However, there appears to have been an increase in oil and gas extraction during this month. Official GDP data for June and the second quarter is set to be released next month, providing more accurate and updated estimates.
