Canadian real GDP managed to rise 0.2 per cent in July, slightly better than expected, but the early read for August points to no growth, according to Friday’s data release from Statistics Canada. Assuming some GDP growth in September, this suggests annualized growth for the third quarter of around 1.3 – 1.4 per cent. This is half the Bank of Canada’s 2.8 per cent projection from July. Overall, real GDP has struggled to gain momentum and is expected to grow just over 1 per cent for the year.
One disappointment in this report is the weakness in construction. The decline in non-residential construction is not surprising, given the high vacancy rate in the office segment. However, sluggish activity in residential construction is an issue, especially at a time when the scarcity of housing remains a significant issue for many households.
The labour market is cooling – Canada’s unemployment rate edged up to 6.6 per cent in August, and the vacancy rate dropped to just 3 per cent in July. Despite a slight cooling, population growth remains rapid, leading to slack in the labour market. Population growth has been 3 per cent over the past year, double the rate of economic growth over the same period.
A weak third quarter indicates that even more slack is opening up in the economy, which will eventually put further downward pressure on inflation. Headline CPI is already at the Bank of Canada’s 2 per cent target and would even be lower if not for the housing-related components. The trend is not cooperating, and the Bank has expressed concern about weak economic growth. This opens up the possibility of a 50-basis-point rate cut at the next policy meeting on October 23rd.
While the market is currently split 50/50 between a 25 or 50 basis point move, a key factor will be how the Bank views evolving demographic trends. Strong population growth has led to excess demand for housing, transportation, and services infrastructure, which in turn has increased inflationary pressures, keeping interest rates elevated for an extended period. However, these pressures may eventually weigh on per capita output, add slack to the job market, dampen wages, and impact productivity. While wage growth remains a concern, the rise in the unemployment rate—especially the 6.5 percentage point increase for youth—can largely be attributed to this increase in population.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Canada’s one-size-fits-all approach to housing policy isn’t addressing the areas where real market failures exist. The two most pressing issues—inadequate options for lower-income individuals and families, and high housing costs for the middle class—demonstrate the need for distinct solutions.
Is it time for a policy revamp? Get our take in the latest Housing Affordability Watch: Is it Time to Revamp Canadian Housing Policy?
Independent Opinion
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