Canada GDP

Private Sector Weakness Justifies Further Rate
Cuts – Could Prompt Investment Recovery

Government spending boosted GDP growth. Real gross domestic product growth accelerated, reaching an annualized rate of 2.1 per cent in the second quarter. This was driven by a 6.7 per cent increase in government consumption and investment but moderated by a modest 0.9 per cent rise in private sector spending. The restrictive monetary policy implemented by the Bank of Canada (BoC), however, continued to exert downward pressure on interest-sensitive sectors of the economy. As a result, household consumption dropped by 7.9 per cent and private residential investment declined by 7.3 per cent. Moreover, despite the completion of the Trans Mountain Pipeline boosting oil production, export activity decreased due to lower exports of automobiles and other major commodities.

Another rate cut expected in September. Looking past the elevated headline growth figure, private sector performance was notably weak. On top of that, the economy continued to be outpaced by population growth, resulting in the fifth consecutive quarterly decline in per capita GDP. With the advance estimate showing no growth in July’s output, third-quarter economic growth is likely to fall short of the BoC’s 2.8 per cent expectation. Despite this, receding inflationary pressures are expected to help the BoC maintain its easing stance at the September policy meeting. Furthermore, the latest Bloomberg survey indicates that economists now anticipate faster and deeper rate cuts than previously forecasted, with the overnight rate projected to fall below 3.0 per cent by the end of 2025. 

Commercial Real Estate Outlook

Retailers to experience short-term pullback. After retail sales dipped in June, causing declines in five of the past six months, weak household consumption growth in the second quarter confirmed a broader slowdown in consumer spending. This trend is expected to continue through year-end as households reduce spending amid elevated interest rates. Consequently, retail space demand is forecast to soften in the second half of 2024, leading the vacancy rate to rise for the first time since 2020. However, it is predicted to remain tight below 2.0 per cent due to supply growth dropping to a new post-pandemic low. In the coming year, as the impact of elevated interest rates diminishes, space demand is expected to rise again, likely driven by a recovery in consumer spending on a per capita basis.

Resurgence in investment could surpass expectations. With market consensus pointing to faster and deeper rate reductions, the transaction market could experience a stronger-than-expected recovery in the coming quarters. As of mid-2024, the trailing 12-month total dollar volume has already registered an annual increase, driven by upward momentum in the retail and multifamily sectors. More aggressive policy easing by the BoC could accelerate competition for deals, shortening the window for investors to capitalize on the current market environment of relatively subdued sale prices and elevated yields. Moreover, emerging markets such as metros in Alberta are expected to garner more investor interest, as the region’s booming energy sector, diversifying economy and high population gains are likely to foster above-average economic growth.

* Includes final consumption expenditure and gross capital formation; ** Trailing 12-month sum
Sources: Marcus & Millichap Research Services; Altus Data Solutions; Bank of Canada; Bloomberg; Statistics Canada