Canada's Q2 GDP growth lags expectations; contraction seen in July

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FILE PHOTO: A person shops at the North Mart grocery store in Iqaluit

By Julie Gordon

OTTAWA (Reuters) -Canadian economic growth lagged in the second quarter and most likely dipped into negative territory in July, data showed on Wednesday, signaling the economy may be cooling more quickly than expected ahead of a rate decision next week.

Canada's economy grew at an annualized rate of 3.3% in the second quarter, Statistics Canada said, short of the Bank of Canada's forecast for 4.0% and well below analyst forecasts of 4.4%.

Real GDP edged down 0.1% in July, Statscan said in an advance estimate, reversing June's gain of 0.1%. Declines in July were driven by lower output in manufacturing, wholesale, retail trade and utilities.

"I think it all signals that the economy is weakening, perhaps faster than even we expected," said Jimmy Jean, chief economist at Desjardins Group.

The negative print for July suggests third-quarter growth will come in short of the Bank of Canada's forecast of 2.0%, said economists. Still it was unlikely to sway the central bank from its current tightening path.

"For the Bank of Canada I don't think this really changes much. Their target, their major focus is inflation above all, so even though growth is a little bit shy of expectations, there's really no relief here," said Doug Porter, chief economist at BMO Capital Markets.

Canadian inflation eased to 7.6% in July from a near four-decade high of 8.1% in June, but remains far above the central bank's 2% target.

Money markets see a roughly 75% chance the Bank of Canada will increase rates by 75 basis points at its decision next week, following a surprise 100-bp hike to 2.5% in July.

After that decision, Governor Tiff Macklem said the economy would likely have a "soft landing," though the path to avoiding a recession was narrowing.

Second-quarter growth was driven by business investment in inventories and household consumption, with Statscan noting that Canadians spent more on clothing and shoes amid a return to the office and an uptick in travel as COVID-19 pandemic restrictions faded.

But imports grew more than exports in the quarter, moderating gains, with investment in housing also dropping sharply. Canada's real estate market, which had been red hot, has turned cold amid higher interest rates.

The Canadian dollar was trading down 0.1% at 1.31 to the greenback, or 76.28 U.S. cents, after the data.

(Reporting by Julie Gordon in Ottawa; Additional reporting by Dale Smith, Ismail Shakil and Steve Scherer in Ottawa; Editing by Paul Simao and Andrea Ricci)