Canada's economy likely hit a speed bump in July, according to RBC Economics, which expects monthly gross domestic product to come in flat. The forecast, released ahead of Statistics Canada's official reading on Tuesday at 8:30 a.m. ET, points to a loss of momentum after a relatively strong spring and raises the risk that the third quarter as a whole will underperform.
What RBC is seeing
RBC's call for zero growth in July is weaker than the 0.1% gain that the bank says is the consensus forecast among economists. The research arm of Royal Bank of Canada attributes the softness to a broad pullback in manufacturing, wholesale, and retail activity, while oil and natural gas production appeared roughly unchanged from the prior month.
One bright spot: a rebound in the housing market may have provided some offset through real estate-related activity, including commissions and legal services. But that wasn't enough to prevent an overall stall, according to RBC.
The flat reading follows a spring that saw the economy expand at a healthier clip, so the July pause is more about a loss of momentum than a contraction. Still, it's a sign that the recovery remains uneven and sensitive to high interest rates.
Why it matters for the Bank of Canada
The GDP report is closely watched by the Bank of Canada, which has been navigating a delicate balancing act between taming inflation and avoiding an unnecessary slowdown. After a series of interest rate hikes, the central bank has begun to ease policy, but the pace of future cuts will depend heavily on how the economy evolves.
A flat July, if confirmed, would give the Bank of Canada more room to consider further rate reductions without worrying that it's fueling an overheating economy. On the other hand, if growth surprises to the upside, it could slow the easing cycle.
Investors will also be parsing the details for clues about underlying demand. Weakness in manufacturing and retail suggests consumers and businesses are feeling the pinch of still-elevated borrowing costs, even as inflation has cooled from its peaks.
What it means for investors
For everyday investors, the GDP report is more than just a macroeconomic headline—it can move markets. A softer economy often translates into lower corporate earnings, which can weigh on stock prices, particularly in cyclical sectors like industrials, materials, and consumer discretionary.
It can also influence bond yields and the Canadian dollar. If the economy is stalling, investors may expect the Bank of Canada to cut rates more aggressively, which typically pushes bond yields down and can weaken the loonie. That, in turn, affects the returns on foreign investments and the cost of imported goods.
RBC's forecast is just one bank's estimate, and Tuesday's official data could surprise. But the fact that a major bank is flagging downside risk to its own third-quarter projection is a signal that the economic path is far from certain.
For those with diversified portfolios, the key takeaway is that the Canadian economy is in a cooling phase, and that's likely to keep the Bank of Canada in an easing mood. That could be supportive for rate-sensitive assets like real estate investment trusts and dividend-paying stocks, while posing headwinds for sectors tied to economic growth.
As always, it's wise to avoid making knee-jerk moves based on a single data point. Instead, watch the trend: if upcoming months continue to show stagnation, it could have broader implications for corporate profits and market performance.
Statistics Canada's release on Tuesday will provide the first official look at July's economic activity. RBC's forecast is a reminder that the recovery is not a straight line, and that the central bank's next moves will be data-dependent.
