Canadian economy and inflation outlook
Governing Council members then discussed recent data on economic activity and inflation in Canada. The economy had grown by 2.1% in the second quarter, which was stronger than anticipated in the July Report. This strength was due mainly to an increase in spending by governments as well as a boost to business investment that largely reflected temporary volatility in the aircraft and transportation equipment category. However, GDP per capita had fallen for the fifth straight quarter.
Household spending was weaker than anticipated in the second quarter. Overall consumption growth had slowed to 0.6%, and per capita consumption had contracted by 2.4% while population growth remained strong. Residential investment had also decreased in the quarter, with large declines in renovations and new construction. Members discussed whether weakness in consumption and housing could be due, in part, to caution on the part of households. The household savings rate remained well above pre-pandemic levels, suggesting consumers could be waiting for lower interest rates to make large purchases or enter the housing market, or they were saving in preparation for higher mortgage payments at renewal.
Members discussed recent dynamics in the labour market. Since their last meeting in July, the labour market had continued to weaken, with labour force growth outpacing employment growth. Layoffs remained muted, but unemployment had risen among newcomers to Canada and youth as new workers were having more difficulty finding a job. Wage growth remained elevated when compared with productivity growth. Members expected wage growth to ease in the months ahead given the slack in the labour market.
Consumer price index (CPI) inflation had eased further in July to 2.5%, in line with the Bank’s forecast. Core inflation measures continued to ease as well: CPI-trim had fallen to 2.7%, while CPI-median had decreased to 2.4%. The breadth of inflationary pressures had also waned: the share of CPI components growing above 3% was back to its historical level. Shelter price inflation remained the largest contributor to overall inflation. Members noted that this component showed early signs of easing, with growth in mortgage interest costs coming down and rent inflation edging lower from its recent peak. Inflation also remained elevated in some other services such as personal care and restaurants. The decline in CPI inflation in July relative to June mainly reflected lower inflation in services prices.
Overall, members agreed that the economy and inflation had evolved largely as anticipated in July. With continued excess supply in the economy pulling inflation down, inflation had eased as expected. GDP growth had picked up to about 2% in the first half of the year, slightly stronger than the Bank’s forecast. But preliminary indicators, including monthly GDP by industry, suggested that growth appeared to be soft in June and July. Members agreed this posed some downside risk to the forecast that growth would pick up later in the year.
