Q2 Canadian Growth, Boosted By Record Population Gains, Slows In June And July

Canada’s economy grew a bit more than expected in the second quarter, but falling per-capita gross domestic product and softening household consumption assure the Bank of Canada that it will cut rates for a third consecutive meeting next week.

Canadian GDP rose 2.1% annually in the second quarter, beating the median estimate of 1.8% in a Bloomberg survey of economists and the Bank of Canada’s forecast of 1.5%. Q1 growth was revised up a tick to 1.8%. Q2 growth was the strongest since the first quarter of 2023 and was boosted by the sharp rise in population. Canada’s population grew by 1.3 million people last year to 40.8 million, according to Statistics Canada–its fastest annual pace in Canada since 1957. This is one of the world’s most extensive immigration programs as pressures mount on Trudeau’s government to slow future inflows.

At a 3.2% annual rate, Canada now ranks among the world’s fastest-growing countries, only behind a few African nations with high fertility rates. In 2022, the population grew 2.7%, or by 1.1 million people, a previous record.

According to Bloomberg News, “Only 2.4% of the increase last year came from net births, and the rest was driven by international migration, primarily non-permanent residents such as foreign workers and students. Without temporary immigration, Canada’s population growth would have been 1.2%.”

Political pressure is mounting for the government to cut the influx of temporary residents entering the country in the next few years, but the Bank of Canada recently revised up the federal government’s forecasts of population gains this year and next.

Canada’s economy benefited from strong population growth, but this surge put pressure on infrastructure and services, worsened housing shortages, and led to soaring rents. Concerns about the declining standard of living prompted the government to reduce its immigration targets, serving as a cautionary tale for advanced economies that rely on newcomers to prevent economic decline.

The 2.1% real GDP growth in Q2—up from 1.8% in the first quarter of the year—reflected higher government spending, business investment in non-residential structures (primarily in the oil and gas sector), machinery and equipment, and household spending on services. Growth was reduced by declines in exports, residential construction, and household spending on goods. Population growth outpaced the increase in household spending in the second quarter, and, as a result, per capita household expenditures fell 0.4% after rising 0.3% in the first quarter. On a per capita basis, GDP fell for the fifth consecutive quarter.

Despite federal and provincial programs to boost housing, residential construction declined, falling in eight of the last nine quarters. Housing investment was down 1.9% in Q2, the most significant decline since the first quarter of 2023. The decrease in the second quarter of 2024 was driven by lower investment in new construction (-1.6%), as work put in place for single-family dwellings and apartments fell, primarily in Ontario. Renovations fell 2.6%, and ownership transfer costs, representing the resale market, declined 1.1%, led by less activity in Ontario.

Monthly GDP updates, also released today, suggest that the relatively strong spring performance was followed by a slower summer, as a flat reading for June looks to be followed by a similar result in July. The early reading in July is an evident disappointment, given some hints that activity picked up last month, and it casts some serious doubt on the BoC’s above consensus call of 2.8% growth in the current quarter.

Bottom Line

This is the last major economic release before the Bank of Canada meets again on September 4. Traders in overnight markets put the odds of a rate cut at next week’s meeting at about 98%. Moreover, the US core personal consumption expenditures (PCE) inflation data, the Federal Reserve’s preferred measure of consumer inflation, was tame. The Fed will no doubt follow through with its first rate cut when they meet later next month. Some speculation is that they could reduce rates by more than a quarter-point.

The Bank of Canada has every reason to continue easing monetary policy on every decision date this year–September 4, October 23 and December 11. They won’t stop until the overnight rate, currently at 4.25%, reaches 2.75%, likely in the second half of next year. This will boost housing activity.

More Good News On The Canadian Inflation Front

Inflation in Canada decelerated once again in July to its slowest pace in three years, assuring the central bank will cut rates for the third consecutive meeting on September 4. The US is also widely expected to begin easing monetary policy at its September confab.

The annual inflation rate in Canada fell to 2.5% in July from 2.7% in June, matching market expectations. The deceleration in headline inflation was broad-based, stemming from lower prices for travel tours, passenger vehicles and electricity. This confirmed the Bank of Canada’s expectation that inflation would fall to 2.5% in the second half of this year.

The CPI rose 0.4% in July after falling 0.1% in June. Gasoline prices increased month over month in July (+2.4%), putting upward pressure on the monthly CPI figure. The CPI rose 0.3% in July on a seasonally adjusted monthly basis.

The Bank of Canada’s preferred measures of core inflation, the trim and median core rates, exclude the more volatile price movements to assess the level of underlying inflation. The CPI trimmed edged down to 2.7% last month from 2.9% in June. The CPI median fell two ticks to 2.4%.

The central bank’s two core inflation measures decreased, averaging a 2.55% yearly pace, from a downwardly revised 2.7% a month earlier. The third chart below shows the 3- and 6-month moving averages for the average of median and trim CPI measured as an annualized percentage change. The 3- and 6-month moving averages fell in July, with the 6-month figure just above the central bank’s target of 2%.

Bottom Line

Today’s inflation reading is good news for the Bank of Canada, giving them leeway to cut interest rates in two weeks. July marks the seventh consecutive month that the headline yearly inflation rate has been within the BoC’s target range, bringing the annual pace of price pressures back to its weakest levels since 2021.

Today’s inflation data will give the central bank confidence that the May rise in inflation was temporary. Annual inflation will reach the Bank’s 2% target by some time next year. This opens the way for the Bank to cut the overnight rate on September 4 by 25 bps to 4.25%.

In July, mortgage interest costs and rent remained the most significant contributors to the annual inflation rate change. Mortgage interest costs were up 21% in July compared with 22.3% in June, while rents rose 8.5% compared with 8.8%. Excluding shelter costs, the consumer price index rose 1.2% from a year ago versus 1.3% in June.

Labour markets have eased since the Bank’s last decision date. Canada shed 2,800 jobs in July, and the unemployment rate was steady at 6.4%, its highest level in over two years. Bank officials have expressed their concern that a further decline in the job market may delay a recovery in household spending, putting downward pressure on growth.

Canadian employment data, released August 9 by Statistics Canada, showed a continued slowdown, which historically would have been a harbinger of recession. This cycle, immigration has augmented the growth of the labour force and consumer spending, forestalling a significant economic downturn.

Employment declined again in July, down 2.8K. The employment rate—the proportion of the population aged 15 and older who are working—fell 0.2 percentage points to 60.9% in July. The employment rate has followed a downward trend since reaching a high of 62.4% in January and February 2023 and has fallen in nine of the last ten months.

In July 2024, an increase in full-time work (+62,000; +0.4%) was offset by a decline in part-time work (-64,000; -1.7%). Despite these changes, part-time employment (+3.4%; +122,000) has grown faster than full-time employment (+1.4%; +224,000) on a year-over-year basis.

Public sector employment rose by 41,000 (+0.9%) in July and was up by 205,000 (+4.8%) compared with 12 months earlier. Public sector employment gains over the last year have been led by increases in health care and social assistance (+87,000; +6.9%), public administration (+57,000; +4.8%) and educational services (+33,000; +3.3%) (not seasonally adjusted).

Self-employment changed little in July and was up by 55,000 (+2.1%) year-over-year.

The unemployment rate was unchanged at 6.4% in July, following two consecutive monthly increases in May (+0.1 percentage points) and June (+0.2 percentage points). On a year-over-year basis, the unemployment rate was up by 0.9 percentage points in July.

The jobless rate rose more for recent immigrants, especially youth than those born in Canada.

The unemployment rate for this group was 22.8% in July, up 8.6 percentage points from one year earlier. For recent immigrants in the core working age group, the unemployment rate rose by 2.0 percentage points to 10.4% over the same period.

In comparison, the unemployment rate for people born in Canada was up 0.5 percentage points to 5.6% on a year-over-year basis in July, while the rate for more established immigrants (who had landed in Canada more than five years earlier) was up 1.2 percentage points to 6.3%.

In July, employment in wholesale and retail trade decreased by 44,000 (-1.5%), reflecting a continuing downward trend since August 2023. On a year-over-year basis, employment in the industry was down by 127,000 (-4.2%) in July 2024.

Employment in finance, insurance, real estate, rental, and leasing declined by 15,000 (-1.0%) in July, marking the first decline since November 2023. On a year-over-year basis, employment in this industry showed little change in July 2024.

Public administration saw a rise in employment by 20,000 (+1.6%) in July, following a decline in June (-8,800; -0.7%). Employment in transportation and warehousing also increased in July by 15,000 (+1.4%), partially offsetting declines in May (-21,000; -1.9%) and June (-12,000; -1.1%).

British Columbia experienced the highest job losses, while Ontario and Saskatchewan were the only provinces to add employment.

Adjusted to US standards, the unemployment rate in Canada for July was 5.4%, which was 1.1 percentage points higher than in the United States (4.3%). Compared with 12 months earlier, the unemployment rate increased by 0.8 percentage points in both Canada and the United States.

The employment rate has decreased in both countries over the past 12 months, with a larger decline in Canada. From July 2023 to July 2024, the employment rate (adjusted to US concepts) fell by 1.0 percentage points to 61.5% in Canada, while it declined by 0.4 percentage points to 60.0% in the United States.  Compared with 12 months earlier, the unemployment rate increased by 0.8 percentage points in Canada and the United States.

Bottom Line

This is the only jobs report before the Bank of Canada meets again on September 4. Traders expect further rate cuts at the three remaining meetings this year.

Last week, weaker employment data in the US contributed to a selloff in global equities, as bonds rallied amid increased bets that the Federal Reserve will be forced to cut borrowing costs more deeply and quickly than previously expected.

The interconnectedness of the economies of the United States and Canada implies that any further weakening in the former is likely to permeate into the latter. This scenario affords Macklem the latitude to normalize borrowing costs without the concern of outpacing the Federal Reserve to a degree that could jeopardize the Canadian dollar.