C anada’s Resilient Economy is Rapidly Closing Slack — Pressuring the BoC to TightenGLOBAL ECONOMICS

Key arguments

• Q2 GDP was revised up to 3.8% q/q SAAR and Q3 is tracking 2.0%, showing resilience after earlier fears of a slowdown.
• The traditional output gap has been cut by two-thirds in two quarters, from about -1.4% in Q1 to around -0.5% in Q3.
• With slack nearly closed and other inflation drivers present, the BoC likely needs to tighten from the lower end of neutral and a roughly zero to negative real policy rate.
• July GDP details were mixed, with construction and utilities up but manufacturing, mining/oil and gas, and retail down, partly reversing June gains.

Corresponding source evidence

1. Canada’s 2 -year yield climbed 2 – 3bps and CAD was flat post- data with the BoC priced as a coin flip in a month’s time and 32bps priced for December’s meeting.
2. The only reason for it not being higher is because June GDP was revised up a tick to solid growth of 0.4% which posed a higher than expected jumping off point.
3. Q2 GDP growth is tracking 2% q/q SAAR based on what we know about Q2 and most of Q3 while assuming September GDP will be flat solely in order to avoid skewing the math before we get any September data.