Canada’s Economic Growth Expected to Slow in Q3

A lighter week of economic data is on deck for Canada as traders and investors closely watch for signs that the country's broad-based growth rebound in Q2 extended to Q3. Key releases include retail sales and Survey of Employment, Payrolls and Hours data, and advanced August manufacturing and wholesale sales on Thursday and Friday.

Bank of Canada Governor Tiff Macklem is scheduled to speak on 'economic developments' on Monday in Halifax, which could provide some additional guidance ahead of its interest rate decision on October 28. Retail sales are expected to add to evidence of slowing growth after a Q2 surge, with next week's July data likely showing a 0.8% decline from June.

Underlying weakness was likely sharper when adjusted for gasoline price increases, but strength earlier in the year means volume sales likely remained relatively firm on a year-over-year basis after rising 2% year-over-year as of June. Early wholesale and manufacturing sales reports also signalled a softer start to Q3, declining (excluding price impacts) 0.6% and 1.4% in July, respectively.

The unemployment rate has largely held at 6.4% in Q3, aligning with the view of slower but still positive gross domestic product growth following a 3.3% expansion in Q2. Macklem's speech is expected to provide clues on the risk balance for policymakers as they consider whether to hike interest rates later in October.

The Bank of Canada flagged concerns about broader inflation implications from higher energy prices at its last meeting, but clarified that policymakers are more focused on passthrough to general inflation than on elevated oil prices themselves. Evidence of passthrough to broader inflation has been limited so far, and it's expected that the impact in coming months will remain constrained.