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Economy losing momentum

While the apparent contraction in GDP in May appears to have been partly due to temporary factors, it also reflects the impact of the surge in interest rates on housing. With the business surveys for June also showing a loss of broader momentum, the economy may be slowing even sooner than we anticipated.
We are sending the Weekly early this week as our Toronto office is closed for the Canada Day holiday on Friday. Happy Canada Day!
Stephen Brown Senior Canada Economist
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Canada Economics Update

Housing Watch (Aug.)

Home sales fell further below the pre-pandemic norm in July and pre-construction sales seem to have fallen through the floor, but there is no evidence yet that this is weighing on construction.

16 August 2022

Canada Data Response

Consumer Prices (Jul.)

The fall in headline inflation to 7.6% in July left it lower than the Bank of Canada’s recent forecast but, amid continued broad upward pressure on core prices, we still judge that the Bank is more likely to opt for a 75 bp interest rate hike in September rather than drop down to a 50 bp move as many now expect.

16 August 2022

Canada Data Response

Manufacturing Sales (Jun.)

Manufacturing sales volumes only inched up in June and, with the manufacturing surveys on both sides of the border weakening in recent months, the outlook is growing even more challenging.

15 August 2022

More from Stephen Brown

Canada Data Response

GDP by Industry (Apr.)

The preliminary estimate suggests that the healthy 0.3% m/m rise in GDP in April was followed by a shock 0.2% contraction in May but, as this appears to have been partly due to temporary factors, it probably won’t stop the Bank of Canada from enacting a larger 75 bp interest rate hike next month.

30 June 2022

Canada Chart Book

Tight labour market pushing up wages

The tight labour market is putting upward pressure on wages, with the Labour Force Survey showing a strong 1.0% m/m rise in average hourly earnings in May. While the annual rate of wage growth, at 3.9% y/y, remained lower than before the pandemic, base effects mean it is likely to accelerate to closer to 6% over the second half of 2022. All this adds to the pressure for the Bank of Canada to rapidly tighten policy, particularly as the current weak rate of productivity growth suggests that there is minimal scope for businesses to absorb higher wage costs. We expect the Bank to raise its policy rate by 75 bp in July and follow that with a further 50 bp hike in September and a 25 bp hike in October, to take the policy rate to 3.0%. By then, we think the weakness in the housing market and a sharp slowdown in employment growth will be enough to cause the Bank to pause its tightening cycle, and ultimately remain on the side lines as GDP growth slows below its long-run potential in 2023.

29 June 2022

Canada Economics Weekly

Further rise in inflation cements 75 bp hike

The May CPI data showed that inflationary pressures remain acute across the economy, which reinforces our view that despite growing concerns about the housing market, the Bank of Canada will become a member of the “75bp club” in July.

24 June 2022
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