Canada's growth stronger than expected, bank still seen cutting rates

By Promit Mukherjee

OTTAWA (Reuters) -Canada's economy grew faster than expected in the second quarter, data showed on Friday, but analysts said the central bank was still on track to cut rates for a third consecutive time next week.

Statistics Canada data showed second quarter annualised growth came in at 2.1%, above the 1.6% expected by markets and the 1.5% forecast by the Bank of Canada (BoC).

But in a sign of coming weakness, June growth was flat and Statscan said preliminary estimates showed there would also be no growth in July.

"Weak momentum heading into the third quarter gives ample reason for the BoC to continue cutting interest rates," said Andrew Grantham, senior economist at CIBC Capital Markets.

The GDP figure is the last data set before the Bank of Canada's monetary policy decision next week when it is widely expected to cut its benchmark rate for the third time in a row.

Financial markets now see an 80% chance of another 25 basis point cut in rates on Sept. 4, up from 77% before the data were released. They also forecast two more rate reductions this year after September.

"From the Bank of Canada's perspective it is roughly neutral report - I don't think it changes anything in terms of the bigger picture," said Doug Porter, chief economist at BMO Capital Markets.

Second quarter growth was led by government expenditure, increased business investments and consumers spending higher on services, Statistics Canada data showed on Friday.

But on a per capita basis, GDP continued to contract for a fifth consecutive quarter.

The Canadian dollar slightly extended its gains for the day, rising 0.1% to C$1.3467 to the U.S> dollar, or 74.26 U.S. cents.

Economic growth for the first quarter was revised to 1.8% from 1.7% reported earlier in May, it said.

Most economic indicators point to an economy that is losing momentum under the burden of high interest rates, increasing bets for a rate cut.

Rising unemployment and a wave of mortgage renewals coming up next year have added more pressure on the central bank to reduce its policy rate.

BoC Governor Tiff Macklem hinted during his monetary policy announcement in July at shifting the bank's focus towards boosting the economy rather than suppressing inflation, which economists said was a marked shift in messaging showing concerns around weakening economy.

The bank has trimmed its benchmark rate twice since June to bring it down to 4.5%.

The quarterly increase in the economy was led by government expenditure which expanded by 1.5% on account of higher wages, and business investment on machinery and equipment which surged by 6.5%.

But on a monthly basis, June's stagnant economy followed 0.1% growth in May and was primarily driven by the largest contraction since December 2023 in the goods-producing industries, the statistics agency said.

(Additional reporting by David Ljunggren in Ottawa and Fergal Smith, Divya Rajagopal and Nivedita Balu in Toronto; Editing by Dale Smith and Frances Kerry)