May 2023 GDP: Canada’s economy set to slow —but still grow — in the second quarter

Canada’s GDP rose 0.3% in May, matching market expectations. Output was helped by the easing of supply chain pressures, the end of a federal public servant strike and continued momentum in real estate, but forest fires disrupted Alberta’s oil and gas sector.

Factoring in StatCan’s flash estimate of a 0.2% drop in June, Canadian real GDP is expected to grow at approximately 1% in the second quarter — down noticeably from over 3% in Q1, slightly weaker than what the Bank of Canada had expected. As a result, we’re becoming more confident that the Bank of Canada will hold its policy rate at 5% in September, marking the peak of this tightening cycle.

Stephen Tapp, Chief Economist, Canadian Chamber of Commerce

KEY TAKEAWAYS

Headline

• Canada’s real gross domestic product (GDP) was up 0.3% in May, matching market expectations.
• Output grew in 12 of 20 sectors, led by gains in services, which were up 0.5% on the month, while the goods sector dropped 0.3%.

Movers and Shakers

• As expected, the public sector rebounded in May, following a federal public servant strike of April 19 to May 3, which had temporarily shaved off about 0.1% from the headline GDP number in April.
• In May, forest fires disrupted production in Canada’s energy sector (-2.1%). Alberta’s oil and gas in was hit hardest, dropping 6.6% and recording its largest monthly contraction in over three years. While this is a temporary disruption, we know that fires continued beyond May, and may act as a drag on output for a few more months.
• The easing of supply chains pressures —with an improved supply of semiconductor chips — helped propel wholesale trade (2.9%) and manufacturing (1.6%).
• Improvements in Canada’s real estate sector continue to support GDP, with gains for four consecutive months.

OUTLOOK & IMPLICATIONS

• StatCan’s flash estimate for June is -0.2%. This puts Canada’s real GDP on pace for growth of around 1% in the second quarter. This is slightly weaker than the BoC’s latest forecast, which sees growth of 1.5% for both Q2 and Q3, before slowing further for the following three quarters.
• The market consensus is slightly weaker than the Bank’s outlook: with growth expected to stall (0%) — but no longer fall — by the fourth quarter, consistent with a much softer landing than was previously expected. All told, the Bank of Canada will likely hold their policy rate at 5%, marking the peak of the tightening cycle.

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