No longer is the Canadian economy firing on all cylinders. Come this past July, the economy abruptly stalled. Government officials and many pundits alike pointed to the strong growth numbers for the first half of the year as a sign that economy was on an upward growth path. Accordingly, monetary policy was tightened to take into account an economy that no longer needed as much stimulus. 

Figure 1 Canada' GDP Growth

(Click on image to enlarge)

Granted one month does not necessarily signal a total reversal of fortune. But when looking at the behaviour of individual sectors, one comes away with a feeling that all is not well. The key drivers of the economy----- manufacturing, oil/gas extraction, construction, retail trade and transportation--- all declined.  Of special note, automotive manufacturing was down 13.7%. Mining was off by 1.2% and oil and gas extraction fared worse dropping by 1.8%. In contrast, health, education and public administration expanded, but these sectors are largely driven by demography and thus were expected to add to total output.Looked at differently, the high-productivity sectors have faltered, while the low productivity sectors respond mostly to population changes. Without a return to some positive growth in the goods-producing sectors, overall economic growth will likely be anemic. 

Figure 2 Canada' GDP for July by Sector

What makes these results even more disconcerting is their timing relative to recent two rate hikes by the Bank of Canada. Given that the initial rate hike was announced on July 12^th, July’s GDP would not have been influenced by that rate decision.  We know that there are lags in the effectiveness of rate increases, so we can expect the July rate hike will likely be felt beginning in September. The September 6^th rate increase will hit the economy much later in the year. Both rate hikes have already resulted in a dramatic increase in the value of the loonie which will be evident in the export numbers in the coming months.  

Given that the Bank of Canada has made it is clear that policy is data dependent, we can expect that any rate increases will be on hiatus.