Canadian GDP in May printed in line with expectations, falling for a second consecutive month by 0.1% month-on-month (m/m). GDP growth in June is expected to tick higher, reversing some of this month’s pullback.
Compositionally, 13 of 20 industries registered a decrease on the month. Goods industries contracted again (-0.1% m/m), while the services sector remained flat.
On the goods side, the manufacturing sector bounced back modestly (0.7% m/m) after a larger contraction the month prior. Routine maintenance in the oil patch drove mining/quarrying/oil & gas sector down 1% m/m in May. Elsewhere, the agriculture, utilities, and construction sectors all registered slight declines.
On the services side, the transportation and warehousing sector edged ahead by 0.6% m/m, with most subsectors expanding in May. Meanwhile, the real estate sector grew for a second consecutive month (0.3% m/m) on the back of rising home sales. A 4.8% m/m slowdown in motor vehicle sales and a 0.2% decline in the public sector aggregate counterbalanced services gains.
The advanced guidance for a 0.1% m/m increase in June GDP is driven by increases in retail and wholesale trade and partially offset by a decrease in manufacturing.
Key Implications
May’s weak GDP reading came as no surprise as tariff-related headwinds continue to blow. For the time being, industry data suggest Q2 GDP effectively flat. While this would represent a sharp pullback from Q1 growth, it would be a better outcome than the BoC’s most recent guidance for second quarter growth. Past this, the outlook continues to face considerable uncertainty, not least since Canada and U.S. officials have yet to strike a trade deal.
The Bank of Canada will take this reading in stride, as they continue to weigh softening economic growth against ongoing underlying inflation pressures. At their meeting this week, the Bank decided to hold the policy rate steady at 2.75%, but did not close the door to additional rate cuts. With excess supply building in the economy and inflation showing some signs of containment, we believe there is room to lower the policy rate later this year.
