After notching up eight straight months of gains, the Canadian economy took a pause in July, as GDP was effectively unchanged on a month-on-month basis.
Unsurprisingly, only 11 of the 20 major industry groups saw output expand in July, representing roughly 52% of output – the smallest share since October of last year.
The goods producing sector held things back, pulling back 0.5% after four consecutive monthly expansions. Weakness was relatively widespread, as mining and quarrying contracted 1.2%, due largely to weakness in ¬oil and gas extraction. Construction activity fell 0.5% on weakness in the residential sector, while manufacturing output was down 0.4% on the back of motor vehicle manufacturing. As was noted in the manufacturing sales report earlier this month, this pullback appears to be the result of more significant than normal retooling activity at major auto plants in July.
Services remained the ‘Steady Eddie’ of the Canadian economy, expanding 0.2% in their 16th straight month of growth. Wholesale trade led the way, up 2.0% on broad-based strength. It was a more mixed story across the other major service sectors.
Well that isn’t terribly encouraging. A softer report was to be expected given the impact of auto sector retooling, but in the event, July GDP still disappointed as the pullback in the oil and gas sector added to a generally weak month of activity for goods producing industries. The decline was big enough to outweigh growth in the service sector – which saw its 16th month of growth – its longest run since 2006.
With some of the weakness down to one-off factors, a resumption of growth in August appears to be a reasonable assumption. However, with growth tracking 2.2%, effectively in line with our Quarterly Economic Forecast for the third quarter, it appears that the red-hot growth seen in the first half of the year is likely behind us.
Like the other July economic data, today’s report only partially reflects the impact of Bank of Canada tightening, and so is likely to be discounted by policymakers. But, when taken together with Poloz’s more cautious tone this week, the case for additional monetary tightening in the very near-term does look somewhat weaker.