The Canadian economy outperformed expectations for the second quarter in a row, with Gross Domestic Product (GDP) increasing by 0.5 percent on the quarter in Q2 2024.

While top-line figures are positive, the economy is far from perfect. Consumer expenditure is flagging, and government investment has made up the lion’s share of growth in recent quarters. For the economy to sustainably prosper, the reverse is required.

A third successive interest rate cut by the Bank of Canada (BoC) in September 2024 offers some optimism, however, facilitated by softening inflation. The Consumer Price Index (CPI) grew at its slowest pace since February 2021, recording an increase of 2.0 percent on the year in August 2024.

Global supply disruptions and trade tensions could filter through into inflation volatility, making the BoC’s decision to unwind its policy rate more difficult. Yet, further changes are expected within the next 12 months.

Employment growth effectively stalled in August 2024 while the Canadian unemployment rate edged up to 6.6 percent, implying a cooling jobs market. This will have a strong influence on policy rate choices as well.

Vacancy rates are closer to pre-pandemic levels and fewer job opportunities are filtering into softer wage growth. On a month-on-year basis, seasonally adjusted average weekly earnings increased by 4.0 percent in June 2024.

This backdrop is supportive of additional rate cuts and reinforces a view of lower, slower economic growth. That being said, forecasts for 2024 remain positive and consensus projections suggest GDP might improve by 1.1 percent this year, followed by 1.9 percent in 2025. Geopolitical issues may influence growth trajectories should they escalate, however.