Shrinking economy raises odds Bank of Canada rate hikes at end

financialpost.com:

The Canadian economy slowed more than expected in the first half of the year, a development that could strengthen the case for the Bank of Canada to hold interest rates when it convenes next week.

Gross domestic product (GDP) contracted 0.2 per cent, annualized, in the second quarter due to drops in housing investment, slower exports and depressed household spending, Statistics Canada reported Sept. 1.

The figure is a significant deviation from the growth of 1.2 per cent and 1.5 per cent that economists and the Bank of Canada, respectively, had forecast for the quarter running from April to June.

The statistics agency also made a downward revision to GDP growth in the first quarter from 3.1 per cent, annualized, to 2.6 per cent.

GDP in June contracted 0.2 per cent while preliminary estimates for July show GDP remained unchanged. Wildfires across the country contributed to the flat reading, but weakness was widespread.

The Bank of Canada did not come off the sidelines to raise interest rates until June, meaning the central bank was on pause for the majority of the second quarter. The economy’s surprisingly weak output for the period likely means policymakers will keep the overnight interest rate at the current five per cent.

“The GDP numbers reinforce our view that the Bank of Canada is done hiking,” Desjardins economist Tiago Figueiredo said in a client note. “Yields have moved significantly lower, with markets coming around to our long-standing view that further rate hikes aren’t in the cards.”

Growth in household spending softened in the second quarter to 0.2 per cent, annualized, down from a downwardly revised 4.7 per cent in the first quarter.

Wages grew in the second quarter by 2.2 per cent, following a 1.9-per-cent