Highlights:
- Canadian GDP rose a stronger-than-expected 0.2% in July as an expected transitory drop in oil sands production proved smaller than feared. Markets expected a 0.1% increase.
- Looking through a transitory dip in oil sands output — as well as a weather-related jump in utilities production — underlying growth continues to look solid.
- International trade concerns remain, but the current economic backdrop also clearly still looks strong enough to warrant further interest rate hikes.
Our Take:
The upside surprise relative to market expectations for a 0.1% increase was largely accounted for by a smaller-than-assumed drop in nonconventional oil extraction despite transitory production disruptions at a major oil sands producer. A 3.2% decline in oil sands production nonetheless still subtracted about 0.1ppt from the headline increase. Underlying details were about as firm as expected. Manufacturing production jumped 1.2% and wholesale trade rose 1.4%. Activity at real estate brokerages increased for a second straight month. Utilities output jumped 2.1% although that should reverse as temperatures return to normal after an unusually hot summer. A sharp 1.5% pullback in residential construction activity was the main soft spot. Housing starts were down from earlier in the year over the last couple of months but are still running at a relatively solid 200k+level.
With the increase in July, Q3 GDP growth is tracking almost a percentage point above the Bank of Canada’s call in July for a 1.5% increase (and our own call for a 1.6% gain) in large part, though, because of a smaller-than-expected transitory decline in oil production. Less of a drag from that factor in Q3 also means less of a rebound in Q4 to leave underlying trends running about as expected — and still looking quite solid. Fears of significant trade disruptions with the U.S. have not gone away but, in the mean-time, the economic backdrop still looks clearly strong enough to warrant further Bank of Canada interest rate hikes.
