"It was quite a surprise, 0.3% was a lot softer than we expected. The revision to Q1 (to negative annualized GDP growth of 0.8%) was an even larger surprise," said Scotiabank economist Karen Cordes, noting that the first half of the year has now registered a dip in GDP growth on a net basis. "We're now calling for a 25 basis-point cut by the Bank of Canada with a material risk of a cut by 50 basis points."

Cordes said the real GDP figures show the Canadian economy has deteriorated in recent months more than economists had expected, has lost the resilience it had been showing at the beginning of the year and is in need of monetary policy stimulus. As further evidence of the deterioration, she pointed to the loss of 55,000 jobs in July reported by Statistics Canada.

"It would be hard to justify inaction for another month and a half with these type of numbers," she said, pointing to components of the GDP calculation that had declined or slowed. Export volumes fell in the quarter as did Canada's production of goods. Consumer spending slowed to an annual rate of 2% from the previous quarter's 2.3% and business spending on plant and equipment declined 0.4%.

But while Cordes said the economic warning signs were widespread in the report, other economists weren't so quick to jump on the rate cut bandwagon. HSBC economist Stewart Hall agreed there is a case to be made for a cut, as the economy underperformed the BOC's forecast of a second-quarter growth rate of 0.8%.

"The market is going to fish hard for a rate cut out of the BoC," he said, but added his firm doesn't think the central bank will bite and is expecting a stand-pat stance by the BOC. "There exists a barrier to further rate cuts in response to this picture. Cutting rates in order to goose domestic demand in response to failing external demand is hampered by a consumer already binging on credit."

Hall said total household credit is growing at more than 12%, well ahead of the historical average of 7.4%.

"Does the BOC really want to stimulate consumer demand given the picture on credit accumulation which tends to suggest that offsetting soft external demand from domestic sources merely threatens to imbalance the consumer in the long run," he wrote in a commentary.

RBC economist Paul Ferley forecast no change in the overnight lending rate in response to the second-quarter GDP number, and saw the continued growth in consumer spending in the second quarter as something of a silver lining. Fereley, said his bank assumes the upcoming employment data for August will show a return to positive employment growth, which would temper any slowdown in GDP growth in the second half of the year.

"I think to justify any cut in rates there have to be indications we are seeing even further weakening in growth. Certainly the sizeable drop in employment in July is worrying," he said, noting that in the BOC's last policy statement, BOC Governor Mark Carney appeared to highlight the upside risks to inflation.

McGill University economics professor and C.d. Howe Monetary Policy Council (MPC) member Chris Ragan also predicted the bank will hold the rate steady at 3%, arguing the overnight lending rate is already accommodative. At a meeting of the MPC, Ragan voted that the council recommend a 25 basis point rate hike next Tuesday and said there's a good argument to be made for a hike to head off inflation and inflation expectations.

While he agreed the second-quarter numbers are weak, he said they amounted to "water under the bridge."

"Monetary policy should be done in a forward looking way. There are substantial lags in monetary policy," he said, arguing that any move by the bank next week won't affect economic output for a year and a half to two years.

In the meantime, he said Carney and the rest of the BOC governing council should be looking at the fact that headline inflation has been averaging about 0.4% above the bank's target for the last 18 months, while core inflation has been averaging about 0.4% below the target.

With the price of oil having appreciated so significantly in the last five years, Ragan said it's questionable whether the two inflation measures will continue to run in the same direction. Coupling the results of the BOC's most recent Business Outlook Survey showing a huge upturn in the number of firms anticipating inflation above 3%, with above target headline inflation, Ragan said there's a good argument to raise rates.

"There comes a time when the only credible way to say you care about inflation is by taking action and raising rates," he said.

By Sean McKibbon, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Sarah Sussman, This email address is being protected from spam bots, you need Javascript enabled to view it

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