FXTM economists look ahead to Canadian GDP data, with downside risks to growth expectations

The Bank of Canada forecasts that economic growth will reach 1.5% in the third quarter, but some economists believe that is too optimistic.

Canada's GDP was flat in July, in line with earlier estimates from Statistics Canada, but below analysts' expectations for a 0.1% increase.

In its preliminary estimate in August, the agency projected GDP growth of 0.1 percent.

The Bank of Canada forecasts that the economy will grow by 1.5% in the third quarter, butSome economists consider this too optimistic.

Robert Kavsic, an economist at Bank of Montreal in Canada, said after the September 29 data release: "In general, assume that the impact of high interest rates continues to erode,Growth in September remained moderateThis means that the Canadian economy will remain stable or grow slightly throughout the third quarter. "

Here are economists' views on the latest data.

Claire Van,Economist at Royal Bank of Canada

"Contrary to sticky inflation, where the Bank of Canada's 2 per cent inflation target remains above, Canada's GDP growth backdrop continues to soften. With interest rates already at very tight levels, further rate hikes by the central bank and other central banks will continue to be highly data-dependent. In Canada, higher-than-expected inflation readings have raised the likelihood of another rate hike by the Bank of Canada this year. But inflation lags behind the economic cycle and there are growing signs thatEarly increases in interest rates have begun to cool the economyWe will also see another consumer price index and labour market report before the Bank of Canada's decision on October 25Our own base case forecast does not include additional BoC rate hikes. "

Mark Elcolau.Economist at TD Bank in Canada

"Based on today's data and initial guidance for August, there are downside risks to growth expectations for the third quarter, which are significant compared to our modest forecast of 1% growth for the third quarter. This is also significantly lower than the Bank of Canada's 1.5% estimate. As expected, today's data finally lowered market expectations for another rate hike in the coming month, and the market has reduced the probability of a rate hike at its next meeting to 35%. The Bank of Canada must weigh the renewed inflationary pressures in August against the backdrop of slower growth, especially on the Bank of Canada's core indicators.The Bank of Canada needs to remain vigilantMore evidence of a cooling economy is needed to be reassured until the situation stabilizes. Next week's employment and wage update and next month's September inflation data will be two key indicators to monitor and will inform the Bank of Canada's next round of policy decisions on October 25. "

Jay Murray,Monax Canadian Currency Analyst

"Overall, today's report suggests that after stagnating in the second quarter, the Canadian economy continued to stall in the third quarter, especially considering that Enterprise Canada's business sentiment index fell in September to its lowest level since the start of the pandemic. However, the composition of growth here is significant because both the July data and the preliminary August data suggest that headline GDP figures are mechanically suppressed by inventories and external conditions, thus underestimating the state of domestic growth, one of the important determinants of core inflation. So, on the surface,The latest data is a conundrum for the Bank of CanadaWithout confirmation that the latest rise in core inflation stems from more resilient domestic growth conditions, we think it remains questionable whether the Bank of Canada will raise interest rates again. "

Robert Kavsic,Bank of Montreal analyst

"While some interference has affected the'cleanliness' of recent GDP data, the bigger problem is that,Canada is having a really hard time growing right nowReal GDP has been largely unchanged over the past six months, and that looks even worse given the population is exploding at 3 per cent per annum. The Bank of Canada remains focused on solid core inflation and wage growth, but growth difficulties suggest they need to continue to stay buoyant and rely on the tightening already in place. "

Matthew Arseno and Alexandra Dusham,National Bank of Canada

"The economy will remain largely unchanged in the third quarter, well below the Bank of Canada's 1.5 per cent growth forecast. This misstep is in fact similar to the second quarter, when the Bank of Canada's estimated 1.5 per cent growth was also compared to virtually no actual growth. We don't think this lack of momentum will be reversed anytime soon. As we showed in an article published yesterday,Consumer and small and medium-sized business confidence is at a declining level, which further reinforces our view that activity contracted in the fourth quarter. However, the Bank of Canada may be tempted to raise interest rates due to an unexpected rise in inflation. In the September record of decisions, members agreed that they needed to confirm that slowing demand was easing inflationary pressures before they could lower their guard. Since inflation is a lagging indicator and interest rates have a delayed impact on the economy, there is a high risk of over-tightening in this approach. "