Canada: As the weather heated up, the economy was cooling down – CIBC

Data released on Wednesday showed a solid growth rate in Canada during the second quarter of 3.3%, however, it was below expectations of 4.5%. Analysts at CIBC point out the numbers were far from a disaster and continue to show solid growth. They expected a 75 basis point rate hike from the Bank of Canada next week. 

Key Quotes: 

“As the weather heated up, the Canadian economy was cooling down. While growth in Q2 as a whole was solid at an annualized +3.3%, and little changed from Q1's pace, it was disappointing relative to consensus expectations (+4.4%) and was largely driven by an acceleration in early spring. The latest monthly GDP figures, including an advance estimate for a slight decline in July, have shown a broadly flat trend starting in May. While we still expect that the Bank of Canada will hike interest rates further to combat high inflationary pressures, a cooling economy supports our view that the peak will be lower than financial markets have been pricing in

“Today's GDP figures were far from a disaster, and still show that the Canadian economy managed to achieve solid growth during a period of time that the US economy was contracting. However, somewhat cooler growth in Q2 and Q3 than the Bank of Canada recently forecasted should give policymakers comfort that inflation will start to ease more meaningfully later in the year without interest rates needing to move too far into restrictive territory.”

“We still forecast a 75bp hike from the Bank next week, that will take the overnight rate to 3.25% and into a range that policymakers think is restrictive (above 3%). However, we also expect a pause after that as the Bank reassess the impact of these restrictive rates on growth and inflation.”