Zero Growth in August Keeps Bigger Canada Rate Cuts on the Table

The Canadian economy showed more signs of weakness that should keep the Bank of Canada cutting interest rates to boost growth.

(Bloomberg) — The Canadian economy showed more signs of weakness that should keep the Bank of Canada cutting interest rates to boost growth.

Preliminary data suggest gross domestic product was flat in August as declines in manufacturing and transportation offset gains in oil and gas extraction and the public sector, Statistics Canada reported Friday in Ottawa.

That would be the third month of zero growth in six months, even though it followed a 0.2% expansion in July, which beat a median estimate of 0.1% increase in a Bloomberg survey of economists.

Overall, the data point to the economy expanding at a 1% annualized pace in the third quarter, below economist estimates of 1.5% and the central bank’s forecast of 2.8%.

Bank of Canada policymakers are increasingly focusing on preserving economic growth after inflation hit the 2% target in August. Governor Tiff Macklem has explicitly said the central bank wants the economy to grow faster than 2%.

Officials have already cut rates by 25 basis points for three straight meetings to bring the overnight rate to 4.25%, and they’ve signaled more cuts to come.

Earlier this month, Macklem repeated that officials may cut rates by 50 basis points or more in one decision, if inflation and economic growth decelerate by more than expected. But he also said they could decide to slow the pace of cuts if growth is stronger or inflation is persistent.

The Bank of Canada next sets rates Oct. 23. There are still key inflation and employment reports to come before that decision. Before the release, markets put the odds of a half percentage point cut at about a coin flip.

In July, services industries grew 0.2%, with retail, finance and the public sector leading the gains. Utilities and manufacturing drove increases in goods-producing industries, which expanded 0.1%.

The construction sector contracted 0.4%, the second straight monthly decline, and was the largest detractor to growth in July.

—With assistance from Jay Zhao-Murray.