February 1, 2024
Canada’s real gross domestic product grew 0.2 per cent in November and early estimates suggest December growth was even stronger, a sign of economic resilience that some economists say could take the pressure off the Bank of Canada to cut interest rates.
The November result — which marked the first monthly GDP increase since May — topped the consensus forecast and also came in above an advance reading of a 0.1 per cent gain.
“The Canadian economy returned to growth towards the end of 2023, and somewhat more emphatically than anticipated,” CIBC economist Andrew Grantham wrote in a note after the Statistics Canada data was released on Jan. 31. The national statistics agency said most of the growth came from goods-producing industries, including manufacturing and wholesale trade, which saw their biggest gains since January 2023.
Bank of Montreal chief economist Douglas Porter said since those sectors are heavily influenced by exports, “it seems that the surprising resiliency in the U.S. economy is indeed spilling over into some sectors in Canada.” Gains in both non-durable and durable goods manufacturing helped the sector chalk up the biggest contribution to the monthly GDP gain, noted TD economist Marc Ercolao.
Wholesale trade rebounded by 0.7 per cent after two months of declines. A preliminary estimate of 0.3 per cent growth in December means GDP may have increased 0.3 per cent in the fourth quarter after posting a decline in the third quarter. That would bring economic growth in 2023 to 1.5 per cent, the statistics agency said.
December’s advanced reading was driven by increases in manufacturing, real estate and oil and gas. “Canada had a far firmer growth backdrop to end 2023 than expected, and this points to an upward revision to 2024 estimates,” BMO’s Porter wrote.
If December’s estimate is close to accurate, there’s much more momentum heading into 2024 than was expected, he said. That could also mean less pressure on the Bank of Canada to start cutting interest rates any time soon. “This solid result, after a long dry spell for growth, affords policymakers the ability to gently push back on easing chatter, as they wait for underlying inflation to come down further,” Porter said.
Royal Bank of Canada economist Claire Fan, however, cautioned that the re-acceleration of growth should be taken with a grain of salt, noting that early GDP estimates have been highly revision-prone and other data have been softer.
She added that a lot of the strength in November was due to one-off factors that are unlikely to be repeated in the following months. These include recoveries from earlier factory shutdowns, like those in the chemical and metal sub-sectors, and strike activities, such as the workers strike at the St. Lawrence seaway.
At face value, the advance December estimate shows growth in the fourth quarter of 2023 is tracking an annualized increase of 1.2 per cent, which is above RBC analysts’ tracking for a small decline, Fan said.
“Overall we continue to expect pressures from elevated interest rates to curb consumer demand, stalling growth in both output and inflation over the first half of 2024 before the Bank of Canada is expected to cut rates in June,” Fan wrote.
Ercolao of TD Economics said markets are still focused on the timing of rate cuts, but a heating up of the Canadian economy may push expectations for a first cut further down the line.
While the Bank of Canada remains in a holding pattern as it awaits confirmation that inflation will decisively settle at their two per cent inflation target, he wrote, “strong data prints like November’s GDP release will be keeping the Bank on their toes.”
