The Canadian economy avoided a contraction in May

The country’s real gross domestic product (GDP) was flat in May after rising 0.3% in April, Statistics Canada reported on Friday.

Growth in the service manufacturing industry was offset by a decline in the commodity manufacturing industry, the agency said.

The Royal Bank’s deputy chief economist Nathan Janzen said the economy faces long-term constraints on productive capacity, partly because of ongoing labor shortages.

We expect growth to slow, but that’s partly because the current economy is incredibly strong.said Mr. Janzen, noting that the economic recovery from the pandemic has been much faster than expected.

A preliminary estimate of GDP for the second quarter suggests annualized growth of 4.6%, compared to 3.1% for the first three months of the year.

After a severe blow at the beginning of the pandemic, the GDP real exceeded its pre-pandemic level in November 2021.

We have reached a very strong point in the economic cycle earlier than expected. But the challenge from there [est] this is unbearablehe said.

The strength of Canada’s economy will have repercussions for the Bank of Canada’s next interest rate decision aimed at curbing high inflation.

Earlier this month, the central bank raised interest rates by a full percentage point, marking the largest single hike in more than 20 years.

New rise oversized Insight?

CIBC economist Andrew Grantham said he believes strong annualized growth in the second quarter would increase the likelihood that the Bank of Canada will make another outsized rate hike in September.

That solid growth, coupled with the details of today’s data suggesting that supply constraints rather than a slowdown in demand are holding back overall growth, means the Bank of Canada remains on track to fail another meeting at its next meeting announce default rate hikeargued Mr Grantham in an email.

The Bank of Canada will make its next interest rate announcement on September 7th.

The Royal Bank is forecasting two consecutive quarters of negative growth next year, which would fit the definition of a technical recession. However, Janzen noted that the slowdown should be moderate. Moreover, given the first signs of easing global inflationary pressures, the Bank of Canada could start reversing rate hikes as early as next year.

With annual inflation at 8.1%, the highest in 39 years, the central bank has indicated it will keep raising the cost of borrowing to reduce demand in the economy in hopes of lowering inflation, without one trigger recession.

Janzen said he expects a half a percentage point rate hike in September and believes the Bank of Canada will eventually raise interest rates to 3.25% before beginning to reverse hikes.

Decline in construction and manufacturing

The construction and manufacturing sectors saw the biggest declines in May, while the transportation and storage sectors posted the biggest gains, according to the report released by Statistics Canada on Friday.

Strikes by Ontario construction workers in May led to delays in the completion of projects, the federal agency said. However, construction activity remained well above pre-pandemic levels.

Manufacturing contracted for the first time in eight months as auto manufacturing was stalled by a shortage of semiconductor chips.

Gains in transportation were fueled by growth in air travel, which rose 14.1%. Those results are better than expected as Statistics Canada’s preliminary estimate indicated the economy contracted 0.2% in May.

On Thursday, the US Commerce Department said the US economy contracted in the second quarter, in line with the previous quarter, but CIBC economists expect growth to recover in the second quarter.

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