Key Takeaways
The Canadian economy remains resilient, for now,
despite a softer outturn in July jobs growth. This
followed a very strong report in June and the pace of
monthly GDP has improved in recent months.
While strong immigration flows have improved the
supply of labour, they have also boosted demand
within the economy, with consumption growth very
robust in Q1, at 5.7% quarter over quarter annualised.
The net of these two effects suggests that imbalances
remain in the Canadian economy, with the BoC’s
preferred measures of inflation moving sideways.
In light of this, the BoC has returned to the table with
consecutive hikes in June and July.
But headwinds are coming. Nearly 500bps in
cumulative tightening, increasing mortgage costs, and
large debt burdens will likely weigh on Canadian
consumers in H2.
Businesses will also face higher costs of capital and
tighter lending standards, weighing on investment.
This private sector retrenchment should pull the
economy into recession at the turn of the year.
Therefore, we think the BoC may well have finished its
hiking cycle. But the bar for a September hike is low if
resilience persists and inflation continues to move
sideways.