Economic activity growth remains solid in May

GDP grew 0.2% month-on-month in seasonally adjusted terms in May (April: +0.3% mom). This was double market expectations and the preliminary estimate of 0.1%. Advance information indicates that real GDP increased 0.1% in June: If confirmed, this would put the quarter-on-quarter economic expansion over Q2 as a whole at slightly above 2% in annualized terms. This would mark an acceleration from Q1’s figure.

May's reading was broad-based, with output expanding in 15 of 20 industries; the manufacturing, utilities, agriculture and hospitality subsectors performed particularly well. In contrast, oil and gas extraction declined due to maintenance at some facilities in Alberta province. Regarding the flash June data, the construction, real estate and finance sectors underpinned the expected expansion.

On the outlook, TD Economics’ Marc Ercolao said: “GDP readings of late have been relatively stable, allowing the Bank of Canada to keep its focus more squarely on the evolution of inflation, especially with the start of its interest rate easing cycle well underway. With two interest rate cuts under its belt–and likely a couple more this year–we'd expect the growth backdrop to continue to be supported. The BoC is particularly upbeat about third quarter growth (2.8% q/q annualized), but we expect the weight of still-high interest rates to result in more trend-like growth next quarter.” Desjardins’ Marc Desormeaux painted a more muted picture: “Real GDP gains continue to lag the pace of population growth. In June, we highlighted that Canadian output per person had fallen in six of the past seven quarters—a streak not previously seen outside of a recession. [The Q2] data suggests it will be seven out of eight once the Q2 GDP by expenditure and population data are released in the months ahead. Given that job creation is being far outpaced by headcount gains, all signs suggest economic slack continued to increase in the second quarter.”

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