Today’s GDP report should give the Bank of Canada ammunition for further rate cuts, brokerage economists are saying. Canadian GDP was unchanged in April, a result that was weaker than expected.

On a year-over-year basis, GDP is up 2.2%, with almost all of that gain in the services sector. The goods producing sector saw a 0.1% gain, thanks to a 23.5% jump in oil and gas exploration. Manufacturing fell for the fifth time in six months, with telecommunication equipment output dropping 14.2%.

RBC DS Capital Markets Research says, “The consumer was still out in full force, spending at a robust 0.8% month-over-month pace. The manufacturing sector looks to be approaching a bottom.” Economists were buoyed by improved numbers from the auto sector, an important area that has slumped in recent weeks. However, the telecom sector is still problematic, says BMO Nesbitt Burns, noting that inventories still need to come down, despite a huge drop in output.

RBC DS says, “Strike activity took a toll on the economy. Not only did it cause iron mine production to fall significantly for the second consecutive month, but nationwide strike action in the public sector single-handedly shaved 0.1% from overall economic growth rate. We would expect this sector to rebound in May, as these strikes have since ended.”

Economists expect to see the weakness continue. “Today’s figures indicate that the economy will remain soft in Q2, corresponding to weak U.S. demand. Evidence that inventory overhang continues to plague the telecommunications industry, suggests that this sector will drag growth again in the quarter,” says DS.

CIBC World Markets cautions that monthly data is no longer as valuable in predicting quarterly GDP since the quarterly data was shifted to a chain weight measure. “In particular, the quarterly data will tend to give a bit more weight to the energy sectorÕs gains. But the soft start to the quarter, after a weak end to Q1, does point to a deceleration in GDP from Q1¹s 2.5% gain. We look for a roughly 1% real GDP growth rate for the quarter, with the weakness centered on exports and business investment.”

Nonetheless, the weak results point to further rate cuts. “Today’s GDP is consistent with an economy that is going through a period of modest growth, with neither widespread strength nor widespread weakness. The report clearly shows that Canadian manufacturing is weighing on activity but that consumers have thus far provided enough support for growth to remain positive,” says BMO Nesbitt Burns. “With no growth for the last three months, the data provides justification for further modest interest rate action by the Bank of Canada.”

DS agrees, “The door remains open for another 25 basis point cut by the Bank of Canada, but with domestic demand holding strong and a fair bit of stimulus already in the pipeline, this would likely be the final move.” CIBC notes that the job scenario will be the key to deciding on interest rates, “The front end of the yield curve, which has prematurely priced out any chance of a Bank of Canada rate cut in July, got a bit of support from the softer than expected GDP report, with spreads vs. US yields narrowing slightly. But a real change in sentiment awaits next FridayÕs reading on June employment.”