Canada's Economy Unexpectedly Grows In July, Though Momentum Slows

Canada's economic activity unexpectedly edged up in July, while gross domestic product in August was most likely flat, data showed on Thursday, with the surprise gain seen unlikely to change much for the central bank.

The Canadian economy grew 0.1% in July, compared with analysts' forecast for a 0.1% decline, Statistics Canada data showed. Growth in goods-producing industries more than offset the first decrease in services-producing industries since January.

"The economy fared better than anticipated this summer, but the showing still wasn't much to write home about," Royce Mendes, head of macro strategy at Desjardins Group, said in a note.

The slight gain in July and likely lack of growth in August suggest third-quarter annualized GDP growth of about 1%, well below the Bank of Canada's most recent forecast of 2.0%, analysts said.

"After a solid first half of the year, momentum appears to be slowing as multi-decade-high inflation and rapidly rising interest rates weigh on the economy," Benjamin Reitzes, Canadian rates and macro strategist at BMO Economics, said in a note.

The Bank of Canada hiked rates by 75 basis points to 3.25% earlier this month to fight inflation, which began to cool slightly in July, but is still running at levels not seen in nearly four decades.

The July GDP data showed oil sands extraction drove growth, jumping 5.1% on higher output, with crop production also helping, up 7.2% mainly on volumes of wheat and other grains.

Demand for Canadian wheat has increased since Russia's Feb. 24 invasion of Ukraine, which Moscow calls a special military operation, helping push up export volumes.

But Canada's retail trade sector contracted sharply in July, falling to its lowest level since December 2021, pushed down by a 7.1% decline in output at gasoline stations, Statscan said, though that likely reversed in August.

Accommodation and food services also contracted in July, driven by less activity at bars and restaurants.

Hot inflation means the Bank of Canada will likely hike interest rates at its next decision in late October, but then the game may change, economists said.

"The deceleration in economic momentum is why we see the Bank of Canada only hiking rates once more in October," Mendes said. Money markets are betting on a hike in October, with one more in December or January to bring the central bank's policy rate to 4.00%.

The Canadian dollar was trading 0.4% lower at 1.3661 to the greenback, or 73.20 U.S. cents.