The Canadian economy avoided a contraction during the month of May

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The economy Canadian company avoided a contraction during the month of May

The most notable declines in growth in May were in the construction and manufacturing sectors.

The Canadian economy remained stable in May as growth slowed as businesses continued to face supply constraints and rising interest rates. Economists warn that the current cycle of rising interest rates is likely to continue into the fall.

The country's real gross domestic product (GDP) remained unchanged in May after expanding 0.3% in April, Statistics Canada reported Friday.

Sector growth Services-producing activity was offset by a decline in goods-producing sectors, the federal agency said.

The Deputy Chief Economist of Royal Bank, Nathan Janzen, pointed out that the economy is facing constraints on long-term production capacity, in part because of the persistent labor shortage.

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We expect growth to slow, but that's partly because the current economy is incredibly strong, Janzen said, noting that the economic recovery from the pandemic has been slow. much faster than expected.

A preliminary estimate of GDP for the second quarter suggests annualized growth of 4.6% compared to 3.1% for the first three months of the year.

After taking a hit at the start of the pandemic, real GDP exceeded its pre-pandemic level in November 2021.

We have reached a very strong point in the economic cycle earlier than expected. But the challenge from there [is] that it cannot be sustained, he asserted.

The strength of the Canadian economy will affect the Bank of Canada's next decision on its key interest rate as it aims to curb high inflation.

Earlier this month, the central bank raised its key rate by a full percentage point, marking its biggest single hike in more than 20 years.

CIBC Economist Andrew Grantham said he believes strong annualized growth in the second quarter would increase the likelihood of the Bank of Canada moving forward with another oversized rate hike in September.

This solid growth combined with the details of today's data, which suggests that supply constraints, rather than slowing demand, are dampening overall growth, means the Bank of Canada is still on track to announce another non-standard rate hike at its next meeting, Grantham argued in an email.

The Bank of Canada will make its next interest rate announcement on September 7.

Royal Bank forecasts two consecutive quarters of negative growth next year, which would meet the definition of a technical recession. However, Mr. Janzen noted that the slowdown should be moderate. Additionally, given early signs of easing global inflationary pressures, the Bank of Canada may begin reversing its rate hikes as early as next year.

With annual inflation at 8.1%, its highest level in 39 years, the central bank has indicated that it will continue to raise the cost of borrowing to reduce the demand in the economy, hoping in this way to bring down inflation without triggering a recession.

Janzen says he expects a half-percentage-point rate hike in September and believes the Bank of Canada will eventually raise its key interest rate to 3.25% before starting to reverse its benchmarks. increases.

According to the report published Friday by Statistics Canada, the largest declines in May were recorded in the construction and manufacturing sectors, while that of transportation and warehousing had the highest gains.

Strikes by construction workers in Ontario in May led to delays in the completion of projects, the federal agency continued. However, construction activity remained well above pre-pandemic levels.

Manufacturing contracted for the first time in eight months, with motor vehicle manufacturing stalled by a shortage of semiconductor chips.

Gains in transportation were boosted by growth in air travel, which rose by 14.1%. These results are better than expected since the preliminary estimate from Statistics Canada suggested that the economy contracted by 0.2% in May.

Thursday , the U.S. Commerce Department reported that the U.S. economy contracted in the second quarter, as it did in the previous quarter, but CIBC economists expect that growth rebounds through the rest of the year.

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