News & analysis

Canada’s economy didn’t grow or shrink in July, with month-on-month growth coming in a tenth below consensus estimates and in line with StatsCan’s advance release. On a year-over-year basis, growth held steady at 1.1%, meeting the consensus view.

While the flat growth data matched the advanced estimates, it came as a shock to us, largely because last month’s advance release had flagged the manufacturing sector as one of the main counterweights to growth, but the subsequent manufacturing sales data came in strongly above expectations. In today’s report, however, StatsCan reported that the manufacturing sector contracted in spite of higher sales and volumes, largely because of lower inventory formation. The sector’s -1.5% month-on-month decline was the principal drag on growth in July—if manufacturing had held flat, GDP for all industries would have risen by almost 0.2%.

At the other end of the spectrum, the main driver of growth was mining, oil, and gas (+1.8%), which had benefited from an $11/bbl increase in the price of WTI crude throughout the month of July. Natural gas was another area in which the sector rebounded as wildfires were brought under control. Although the rally in oil extended throughout Q3 to briefly break $95/bbl in late September, the advance release for August suggests that production fell nonetheless. Despite this, the guidance for next month suggests GDP edged up by 0.1%, led by increases in the wholesaling and finance industries.

Overall, today’s report suggests that, following a stagnant Q2, Canada’s economy continued to tread water in the third quarter, especially considering the CFIB’s Business Barometer fell to its weakest level since the pandemic in September.

However, the composition of growth is important here, as both the July data and advanced August readings suggest that headline GDP data is being mechanically weighed down by inventories and external conditions, thus underreporting domestic growth conditions which are important determinants for core inflation. Therefore, on the surface, the latest data poses a bit of a conundrum for the Bank of Canada. Without confirmation that the latest uptick in core inflation stems from more resilient domestic growth conditions, we think it remains questionable whether the BoC hikes again. This view is shared by options markets, where the 1-month 25-delta risk reversals suggests the market is biassed slightly in favour of USD appreciation.

Inventory drawdowns in manufacturing leads GDP data to underreport domestic growth conditions

Today’s report offered some insight into two key areas of temporary economic weakness, wildfires and BC port strikes.

Notably, the impact of wildfires on growth greatly diminished as industries affected in June rebounded in July. On top of the improvements in natural gas extraction, the mining industry grew by 4.2% MoM, led by a massive 25.6% surge in output from iron mines, while the food and accommodation bounced back by 2.4% on an increase in accommodation services such as hotels, motels, and camping grounds. For the strikes, StatsCan noted that 30 BC ports were closed, including the Port of Vancouver, Canada’s busiest. This led to a -3.4% decline in water transportation, which primarily slowed the flow of imports from China. Domestically, the greatest impact came to the chemical manufacturing subsector, and the recent manufacturing report noted that paper products also saw significant disruptions. That said, rail transportation still increased in spite of the strikes, and shipments of canola and wheat were unaffected.




Jay Zhao-Murray, FX Market Analyst


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