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

Friday’s GDP report is expected to show slight growth in July, but that third-quarter growth is on track to be well below the Bank of Canada’s forecasts. Analysts say it could push the central bank to cut rates more aggressively next month.

Consensus estimates, according to BMO and Scotiabank, predict GDP will rise 0.1 per cent in July, above preliminary data released last month that showed growth would be unchanged. CIBC, Scotiabank and BMO expect GDP will increase 0.2 per cent month-over-month in July. RBC expects an increase of 0.1 per cent.

A modest rise in monthly growth would still leave third-quarter economic growth on track to come in well below the Bank of Canada’s forecasts outlined in its July Monetary Policy Report.

“Even if July posts a better result than the advance estimate, growth for the quarter would still only be tracking a little above a 1 per cent annualized pace,” CIBC economist Avery Shenfeld wrote in a preview note.

“That’s well below the 2.8 per cent pace that the Bank of Canada had forecast back in its July MPR, and as a result there would still be plenty of reason for policymakers to keep cutting interest rates and even accelerate the pace of cuts at future meetings.”

RBC assistant chief economist Nathan Janzen and economist Abbey Xu say a July increase would still be “historically soft” and result in output tracking another per-capita GDP decline in Q3, marking the eighth decline out of the last nine quarters.

“Our base-case forecasts assume the BoC will continue cutting interest rates at a pace of 25 basis points per meeting, but with risks tilted to a faster pace of reductions (in line with the Federal Reserve’s larger 50 basis point initial cut) if the economy softens significantly further,” the RBC economists wrote.

Bank of Canada Governor Tiff Macklem reiterated in a speech on Tuesday that with continued progress on inflation – August inflation hit the Bank’s two per cent target – it is reasonable to expect further cuts in the policy rate.

“Economic growth picked up in the first half of this year, and we want to see it strengthen further so that inflation stays close to the 2 per cent target. Some recent indicators suggest growth may not be as strong as we expected,” Macklem said.

BMO Canadian rates and macro strategist Benjamin Reitzes said in a report released last Friday there is little doubt that more rate cuts are coming from the central bank, “but how far and how fast remain uncertain.” He says this Friday’s GDP report "has the potential to cement expectations for a 50 basis point rate cut in October."

"There is clear signage towards a more aggressive road for the Bank of Canada. We’ll need to see soft GDP growth and continued progress on inflation, while the Fed has provided a helping hand," Reitzes said.

"The October meeting is still over a month away, but the odds of a 50 basis point rate cut are building.”

The Bank of Canada will issue its next interest rate decision, as well as release a quarterly Monetary Policy Report, on Oct. 23. According to Reuters, as of Tuesday afternoon, money markets see a more than 58 per cent chance of an outsized 50 basis point rate cut. Another 25 basis point cut is priced in for the final meeting of the year in December.

With files from Reuters

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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