Weak Canadian Economy Fuels Expectations of a 50-Basis-Point Rate Cut

Canada’s economy sputtered in August, with growth likely stalling after a brief surge in July, bolstering expectations for a substantial interest rate cut by the Bank of Canada (BoC) next month. The latest GDP figures, released on Friday, indicate that the Canadian economy remains sluggish, reinforcing concerns about a potential slowdown.

While July’s GDP growth exceeded expectations, rising 0.2% instead of the anticipated 0.1%, economists view it as a temporary blip, sandwiched between two months of stagnant growth. The advance estimate for August suggests that GDP growth flatlined, pointing towards a weaker-than-expected third quarter.

“Growth appears to be tracking just over 1% for the third quarter, well below the Bank of Canada’s 2.8% forecast,” said Royce Mendes, head of macro strategy at Desjardins Group, echoing the concerns of many economists. He predicts a 50-basis-point rate cut by the BoC at its next meeting on October 23rd.

The BoC has already implemented three quarter-percentage-point rate cuts since June, but Governor Tiff Macklem recently signaled the possibility of larger rate reductions if the economy requires additional stimulus. Money markets currently reflect a strong likelihood of a 50-basis-point rate cut in October, with a further 25-basis-point cut expected in December.

The weaker-than-anticipated economic performance has fueled calls for more aggressive action from the BoC. “The preliminary estimate of unchanged GDP in August suggests that the momentum was short-lived and puts third-quarter growth on track to disappoint,” said Olivia Cross, an economist at Capital Economics.

The Canadian dollar weakened following the release of the GDP data, reflecting concerns about the economic outlook. Yields on two-year Canadian government bonds also declined, signaling expectations of lower interest rates.

Key Takeaways:

• Canada’s GDP growth stalled in August after a brief acceleration in July.
• Economists predict a 50-basis-point rate cut by the Bank of Canada in October.
• The weaker-than-expected economic performance has fueled calls for more aggressive monetary stimulus.
• The Canadian dollar and bond yields declined in response to the disappointing GDP data.

The latest GDP figures highlight the challenges facing the Canadian economy. The BoC’s ability to navigate the complexities of slowing growth, persistent inflation, and global economic headwinds will be closely watched in the coming months.