July GDP report expected to show growth below BoC forecast, could 'cement' more aggressive cut

The GDP report scheduled for release on Friday is anticipated to indicate modest growth in July, but projections for third-quarter growth suggest it will fall significantly short of the Bank of Canada’s expectations. Analysts believe this could lead the central bank to consider more aggressive rate cuts next month.

According to consensus estimates from BMO and Scotiabank, GDP is expected to increase by 0.1 percent in July, an improvement over last month's preliminary data which indicated no change. CIBC, Scotiabank, and BMO predict a month-over-month GDP increase of 0.2 percent, while RBC anticipates a rise of 0.1 percent.

A slight increase in monthly growth would still position third-quarter economic growth well below the forecasts presented in the Bank of Canada’s July Monetary Policy Report.

“Even if July shows a better outcome than the advance estimate, growth for the quarter would still be tracking just above a 1 percent annualized rate,” wrote CIBC economist Avery Shenfeld in a preview note. “That’s considerably lower than the 2.8 percent rate that the Bank of Canada projected in its July MPR, meaning there would still be ample reason for policymakers to continue reducing interest rates and potentially increase the pace of cuts in future meetings.”

RBC assistant chief economist Nathan Janzen and economist Abbey Xu noted that an increase in July would still be “historically soft” and likely lead to another decline in per-capita GDP in Q3, marking the eighth drop in the last nine quarters.

“Our baseline forecasts suggest that the BoC will maintain a pace of 25 basis points per meeting for interest rate cuts, but risks are leaning towards a faster reduction (similar to the Federal Reserve’s larger initial cut of 50 basis points) if the economy weakens significantly further,” the RBC economists stated.

In a speech on Tuesday, Bank of Canada Governor Tiff Macklem reiterated that given the progress made on inflation—August’s inflation rate reached the Bank’s 2 percent target—it is reasonable to anticipate further cuts to the policy rate.

“Economic growth accelerated in the first half of this year, and we aim for it to strengthen further to keep inflation close to the 2 percent target. However, some recent indicators suggest growth may not be as robust as we had anticipated,” Macklem remarked.

BMO Canadian rates and macro strategist Benjamin Reitzes expressed in a report released last Friday that there is little doubt more rate cuts are forthcoming from the central bank, though “how far and how fast remain uncertain.” He added that this Friday’s GDP report "could solidify expectations for a 50 basis point rate cut in October."

“There are clear indications of a more aggressive approach from the Bank of Canada. We’ll need to see subdued GDP growth and ongoing progress on inflation, while the Fed has provided a supportive backdrop,” Reitzes noted.

“The October meeting is still more than a month away, but the likelihood of a 50 basis point rate cut is increasing.”

The Bank of Canada will announce its next interest rate decision and release a quarterly Monetary Policy Report on October 23. According to Reuters, as of Tuesday afternoon, money markets are pricing in more than a 58 percent chance of a substantial 50 basis point rate cut, with another 25 basis point reduction expected at the final meeting of the year in December.