The Canadian economy continued to keep its head above water in May, growing 0.2%, fuelled by expansion in the manufacturing and public sectors.
Statistics Canada’s gross domestic product report released Wednesday said retail and wholesale trade and the oil and gas sector were drags on growth. However, it noted the contribution of the Trans Mountain pipeline expansion to economic growth in May.
“The crude oil pipeline transportation and other pipeline transportation services industry grew 1.5 per cent, driven in part by the entry into service of the expanded Trans Mountain pipeline, with the first tankers carrying Western Canadian Select crude oil leaving the Port of Vancouver in late May,” the report said.
Economists noted that while the latest data is slightly better than expected, it reaffirms the fact that economic growth is tepid, warranting continued interest rate cutting by the Bank of Canada.
The federal agency estimates that growth moderated slightly in June to 0.1 percent, with gains in construction, real estate, rental and leasing, and finance and insurance partly offset by declines in manufacturing and wholesale trade.
For the second quarter, Statistics Canada forecasts real gross domestic product growth at an annualized rate of 2.2%.
“The Canadian economy performed slightly better than expected in the final months of the second quarter, but fell short of a medal-worthy performance when measured in terms of per capita output gains,” wrote CIBC chief economist Avery Shenfeld.
“The data will likely result in some modest upward adjustments to the forecast for second-quarter GDP, but not enough to prevent another rate cut by the Bank of Canada in September, which is more tied to the progress seen in inflation figures.”
The latest economic growth figures come a week after the Bank of Canada cut its key interest rate for a second consecutive time.
Governor Tiff Macklem said the central bank’s decision was partly due to weakening economic conditions.
“This need for a recovery in growth is part of our decision to reduce the key interest rate today,” Macklem said on July 24.
Although the economy has not fallen into recession, growth has been weak, especially when population growth is taken into account.
The labour market has also felt the brunt of high borrowing costs, with graduates and newcomers particularly affected by fewer job opportunities.
The unemployment rate has risen steadily over the past year, reaching 6.4% in June.
Interest rate cuts by the Bank of Canada should ease some of the pressure on the economy, although at 4.5% its key rate continues to constrain economic growth.
Many observers expect the Bank of Canada to make another interest rate cut in September.
“We believe the economic backdrop should give the Bank of Canada room to cut interest rates further at its next meeting in September,” RBC economist Abbey Xu wrote in a note to clients Wednesday.
The Bank of Canada was the first G7 central bank to begin cutting its benchmark interest rate this year.
Separately, the U.S. Federal Reserve said Wednesday that more progress had been made in slowing inflation to its 2% target, a sign the central bank is moving closer to cutting its key interest rate for the first time in four years.