07:11 AM EDT, 09/30/2024 (MT Newswires) -- Scotiabank noted that Canada's gross domestic product for July was faster than expected at 0.2 month-over-month growth based on data released Friday.

August GDP was guided to be "essentially unchanged" which the bank decided to ignore but said the Bank of Canada will have to downgrade its Q3 growth tracking.

This marks the fourth consecutive month of GDP growth and the sixth gain in the past seven months. Trend growth is "mild," pointed out the bank.

What this gives investors is tracking 1% q/q seasonally adjusted annual rate GDP growth in Q3 using monthly production-side accounts if we take July's 0.2 month'-over-month increase, August as flat as per Statistics Canada's highly tentative guidance, and September as flat simply to focus the math on what is known to date.

This may or may not translate well into quarterly expenditure-based GDP growth as the latter does a better job at capturing inventory and net trade effects. It probably counsels significant downside to the BoC's initial 2.8% quarter-over-quarter forecast for Q3 GDP growth that is more likely to come in one-handled when it revises it next month, but exactly where is highly uncertain.

July's details were solid and likely "understated" underlying conditions in the Canadian economy. 12 of 16 sectors were up, four were down but none of the downers did much to GDP growth in weighted contribution terms.

It's "understated" because, as StatsCan put it, "Wildfires impacted several industries across the country in July." Think the tragedy in Jasper as the most extreme and heartbreaking example among several of what happened to a whole community in a beautiful area of the country.

The wildfire effect is probably why the simple model the bank runs for monthly GDP was spitting out faster growth than its 0.2% estimate. This could mean that the dampening effects of wildfires in July could reverse higher from August onward as the wildfire effect stabilizes.

It also means investors should be careful about how July GDP translates into Q3 expenditure-based GDP tracking. Wildfire disruptions -- and perhaps later disruptions to rail in August -- could explain why inventories were up sharply in July. Manufacturing inventories were up by 0.9% month-over-month seasonally adjusted in July and wholesale inventories were up by 0.5% month-over-month SA. Inventory investment is some combination of undesired, planned given serial shocks to supply chains, and driven by rolling shocks and it could be a significant driver of Q3 GDP on an expenditure basis.

Investors are left with a picture of an economy that is underperforming but still growing in trend terms despite massive rate hikes in the pandemic and serial shocks being thrown at it.

Canadian productivity is "terrible," but no political party has a useful plan for what to do about it and both the business community and workers are too willing to schlep off responsibility for their roles, added Scotiabank.

Be careful with population growth as a driver of falling per capita GDP. One reason is that we haven't given enough time for the population shock to impact GDP and it certainly doesn't happen in one or two years versus multiple years. Another reason is that you have to take out temps -- non-permanent residents -- made up of international students, temporary foreign workers and asylum seekers.

The bank believes you have to do that because quotas for them are being reduced which should dramatically lower population growth going forward not in one month or quarter but over the next couple of years. They are a transient population that shouldn't be expected to contribute to short-term GDP in proportionate terms to those born in Canada and permanent resident immigrants.

In any event, the core debate in Canada lies around two tensions. Should the BoC upsize and swing into near panic mode because GDP growth is mild, underperforming, and adding to a fairly modest amount of spare capacity with an output gap estimated around just over -1%, asked the bank. Or should it be more patient, stick to its forecast rebound, and be careful toward upside risks given massive pent-up savings and demand in the household sector plus ongoing fiscal stimulus that may increase into an election year plus mortgage finance easing and runaway real wage gains relative to weak productivity, it asked too.

Scotiabank leans toward the latter. If the BoC leans toward the former and pursues rapid easing, then the bank would counsel raising growth and inflation forecasts and the potential resumption of hiking.