Canadian building permits rose more than four times expectations in June.

But, RBC Financial group economist Allan Seychuk says, this is a volatile indicator that does not lead in lock-step fashion to corresponding gains in construction activity.

Permits rose 4.3% in June, with strength shared between the residential sector (up 4.6%) and the non-residential sector (up 3.9%). “Residential permits are notable not only because homebuilding has been a consistent engine of the economy in the last two years, but also because 2002 marked a near-record year for housing starts,” Seychuk says.

A continuation of healthy activity provides a buffer against a slow U.S. economy and a higher dollar, “not to mention economic shocks like SARS and mad cow disease.”

“That buffer, however, is not enough to offset the downside risks to growth from first two factors, the weak U.S. economy and the dollar’s sharp rise, and therefore we continue to expect a 25 basis point rate cut by the Bank of Canada in early September,“ Seychuk says.