Canada: August’s GDP growth not scary but not strong enough to boost rate hike expectations - CIBC

Analysts at CIBC explained that the August’s GDP growth report was not scary enough to create fears of a slump, but not strong enough for the Bank of Canada to spook investors with a December rate hike. They noted a rebound from earlier weakness in oil and gas and a brisk month for financial services were offset by sluggish results for manufacturing and construction.

Key Quotes: 

“Looking back at a more meaningful 12-month trend, real GDP has advanced at a 2.5% clip. Remember that the Bank of Canada sees the country’s non-inflationary speed limit at 1.9% for the coming year, and is projecting that 1.9% pace for 2020. While there’s talk from the central
bank of pressing ahead towards a 3% overnight rate, it’s hard to see why it would take another five rate hikes to slow growth by a mere half percent.”

“August’s figures were a mixed bag. There was a one-time lift as non-conventional oil output rebounded from earlier disruptions, sending oil and gas production up 1.9%. Total crude oil output has set new highs, part of why the heavy oil differential has been squeezed of late in the face of transportation bottlenecks. Against oil’s outsized gain, manufacturing output dropped 0.6%, partly due to unseasonal shutdowns in auto assembly, although most subsectors registered declines. Factory output was still up a healthy 3.3% from a year earlier.”

“The 0.1% advance was in line with our forecast, so we’re sticking to our 2.2% call for the quarter, assuming a better 0.2% gain in September. That’s a bit firmer than the Bank of Canada’s 1.8% projection, but not a meaningful gap from a policy perspective.”

“Barring some big numbers for employment or core inflation, it will be hard to make the case for a December rate hike, so we’ll retain our view that the next quarter point (and potentially the last one for while) comes in January.”