Bank of Canada needs to 'flip the script' as weak economic data builds up

Weak manufacturing sales are further indicating that Canada’s gross domestic product (GDP) for the third quarter will fall significantly short of the central bank's expectations, likely increasing calls for policymakers to consider more aggressive interest rate cuts.

According to data released by Statistics Canada on Wednesday, manufacturing sales dropped by 1.3 percent in August compared to July, reaching their lowest point since January 2022. This decline was largely driven by reduced sales in metals, petroleum, and coal. Year-over-year, sales fell by 4.4 percent.

The decrease in sales and volumes, along with a reduction in inventories, suggests that “manufacturing GDP weakened, as StatsCan suggested was the case in its commentary alongside the preliminary estimate that GDP was unchanged in August,” noted Stephen Brown, assistant chief North America economist at Capital Economics Ltd.

While GDP increased by 0.2 percent month-over-month in July, the preliminary estimate of flat growth for August, released on September 27, indicates that third-quarter growth is likely to be below the Bank of Canada’s forecast of 2.8 percent.

Most economists at leading financial institutions are now predicting that third-quarter annualized GDP will range from 1 percent to 1.5 percent, with Brown estimating a growth rate of 1.2 percent.

“The persistent struggles of the Canadian economy mean it’s time for the Bank of Canada to flip the script,” said Royce Mendes, managing director and head of macro strategy at the Fédération des caisses Desjardins du Québec, in an analysis on Wednesday. He expects third-quarter GDP growth of 1.3 percent.

“That’s particularly concerning given that the working-age population has grown 3.5 percent over that same period,” he added, pointing out that growth over the past two years has expanded at an annualized pace of “just” one percent.

Both Brown and Mendes are advocating for the Bank of Canada to cut interest rates by 50 basis points during its next policy announcement on October 23. This position is now shared by most of the Big Six banks following the release of weaker-than-expected inflation data on Tuesday.

“Policymakers can and should turn their attention to the deteriorating economic situation,” Mendes stated.

The disappointing manufacturing figures only reinforced this narrative, with both local and global economic slowdowns and reduced demand contributing to a 6.4 percent decline in the value of metals sales and overall sales volumes.

Statistics Canada indicated, “Weaker domestic and international demand for metals due to lower construction and manufacturing activities have pulled the prices of many primary metals lower in the past few months.”

Refined petroleum product sales also felt the impact of global growth concerns, particularly related to China, falling by 5.8 percent month-over-month in August. Year-over-year, sales of coal and petroleum products decreased by 7.9 percent, according to Statistics Canada.

These two sectors were the largest contributors to the overall decline, but Brown remarked that “developments were generally poor across the board,” noting that sales of machinery, computer and electronic products, and electrical equipment all decreased by between 2 percent and 4 percent, signaling that business investment likely fell in the last quarter.

Month-over-month vehicle sales also saw a “sharp” decline of 5.8 percent in August. However, Brown pointed out that aerospace sales provided a “bright spot,” increasing by 7.3 percent month-over-month.

He also mentioned that the S&P global manufacturing purchasing managers’ index (PMI) for Canada remains depressed, indicating a weak manufacturing environment. The PMI, which gauges economic trends in the manufacturing and services sectors, registered slightly above 50 for September. A reading above 50 signifies expansion, while a reading below 50 indicates contraction.