Data Flashes

The Bottom Line:

Canadian GDP was essentially unchanged in August, slightly below our expectation for a 0.1% increase and Statistics Canada’s earlier estimate of 0.2% growth. The result followed another broadly flat reading in July and marked a clear loss of momentum after strong gains in the second quarter.

The composition of the August report was somewhat better than the headline. Retail activity rose sharply, suggesting household spending remained resilient despite higher borrowing and energy costs. Manufacturing and construction output also increased, with another solid gain in engineering construction providing additional support.

Those increases were offset by declines in wholesale trade and public administration. Oil and gas extraction also fell, largely offsetting a sizeable increase in mining output led by potash production. Overall, goods-producing industries edged higher while services output declined slightly.

Based on monthly GDP data through August and Statistics Canada’s preliminary estimate for a 0.1% decline in September, real GDP is tracking at roughly 1.3% annualized in the third quarter. That is below both our 1.8% base-case forecast and the Bank of Canada’s estimate of 2.0% in its October Monetary Policy Report, pointing to some downside risk to Q3 growth expectations.

The comparison should be treated cautiously, however: the September estimate and recent monthly figures remain susceptible to revision, and the quarterly expenditure-based GDP measure can diverge from the monthly industry data.

Overall, the August report suggests growth slowed more abruptly following the strong second quarter, but the underlying picture remains mixed rather than uniformly weak. Resilient consumer activity and continued gains in manufacturing and engineering construction are consistent with an economy that is still expanding, albeit unevenly and at a more moderate pace.

The softer near-term growth profile should reinforce the case for the Bank of Canada to proceed carefully following this week’s rate increase, although future decisions will continue to depend heavily on the persistence of high energy prices and whether inflation pressures broaden.

The details:

• Real GDP was essentially unchanged in August, below our forecast for a 0.1% increase and Statistics Canada’s earlier advance estimate of 0.2%. July growth was also essentially unchanged.

• Goods-producing industries edged up 0.1%, while services-producing industries declined 0.1%.

• Retail trade rose 1.2%, contributing approximately 0.06 percentage points to monthly GDP growth. Activity increased across most retail subsectors, led by motor vehicle and parts dealers. Food and beverage stores, general merchandise retailers, and health and personal care retailers also recorded gains, while gasoline stations and fuel vendors declined.

• Wholesale trade declined 1.4% and subtracted approximately 0.07 percentage points from monthly growth. The weakness was led by motor vehicle and motor vehicle parts and accessories wholesalers.

• Manufacturing output increased 0.3%, led by machinery and petroleum refineries, partially offset by lower transportation equipment production.

• Weaknesses in auto manufacturing and wholesaling partly reflected extended plant shutdowns and a reversal of unusually strong vehicle imports in July. Those temporary factors should eventually unwind.

• Construction activity rose 0.2%, led by a further 1.0% increase in engineering and other construction. Residential and non-residential building construction declined 0.2% and 0.3%, respectively.

• Mining, quarrying and oil and gas extraction was unchanged overall. Mining excluding oil and gas increased 4.9%, led by a 12.0% rise in potash mining. Oil and gas extraction declined 1.2%, largely reflecting a 2.1% decrease in non-conventional oil extraction.

• Public administration declined 0.8%, subtracting approximately 0.06 percentage points from monthly GDP. Transportation and warehousing and finance and insurance provided some offset, increasing 0.5% and 0.2%, respectively.

• Statistics Canada’s advance estimate indicated that GDP declined 0.1% in September. Based on monthly GDP data through August and that preliminary estimate, growth is tracking at approximately 1.3% annualized in Q3, below our 1.8% base case forecast and the Bank of Canada’s 2% estimate.

• That early Q3 tracking remains highly susceptible to revision and may not align precisely with the quarterly expenditure-based GDP estimate scheduled for release in November.

---

About the author:

Abbey Xu is an economist at RBC. She is a member of the macroeconomic analysis group, focusing on macroeconomic forecasting models and providing timely analysis and updates on economic trends.

---