Canada’s economy grew at an annualized rate of 2.1% in the second quarter of 2024, surpassing the expectations of both economists and the Bank of Canada, according to data released by Statistics Canada on Friday. Analysts had predicted a growth rate of 1.6%, while the Bank of Canada had forecast a more conservative 1.5% increase.
Despite the stronger-than-expected quarterly growth, the economy showed no change in June, with the real gross domestic product (GDP) holding steady at 0%. This lack of momentum heading into the third quarter has fueled expectations that the Bank of Canada will continue its pattern of cutting interest rates.
CIBC economist Andrew Grantham noted that the weak momentum at the start of the third quarter provides the Bank of Canada with sufficient reason to proceed with further rate cuts. Financial markets are now predicting an 80% chance of a 25 basis point rate cut at the Bank’s upcoming announcement on September 4, an increase from the 77% likelihood prior to the GDP data release.
Preliminary data for July suggests that GDP remained unchanged, with sectors like construction, mining, quarrying, oil and gas extraction, and wholesale trade experiencing declines, while finance, insurance, and retail trade showed gains. This sluggish start to the third quarter has led to early estimates of a modest 0.5% annualized growth for Q3, significantly below the 2.8% growth forecasted by the Bank of Canada in its latest Monetary Policy Report.
The growth in the second quarter was primarily driven by higher government spending, increased business investment, and a rise in household spending on services. These gains were somewhat offset by declines in exports, residential construction, and household spending on goods, according to Statistics Canada.
Despite the headline growth in Q2, Desjardins managing director and head of macro strategy Royce Mendes cautioned that the Bank of Canada is still on track to reduce interest rates by another 25 basis points next week. He highlighted that the growth was fueled by “unsustainable sources” and warned that the underlying economic strength may be less robust than the headline figure suggests.
Looking ahead, Mendes noted that the unexpectedly weak start to the second half of the year could increase the likelihood of a larger 50 basis point rate cut in October. While the base case still anticipates 25 basis point cuts at each remaining meeting this year, the risks now appear tilted towards more substantial reductions.