March 28, 2024
Canada’s gross domestic product strongly rebounded in January exceeding expectations and February’s preliminary estimates point to another expansion, data showed on Thursday, tempering pressure on the Bank of Canada (BoC) for an early rate cut.
The economy grew by 0.6% in January, its fastest growth rate in a year, which the Statistics Canada called a broad-based expansion led by a bounce back in education services benefiting from an end of public sector strikes in Quebec.
February’s GDP is also likely to have grown by 0.4% with main contributions from mining, quarrying and oil and gas extraction, though other industries will also likely contribute, it said.
Analysts polled by Reuters had forecast a GDP growth of 0.4% on a month-on-month basis in January. December GDP was revised to a 0.1% contraction from zero growth initially reported.
Money markets slightly trimmed their bets for a first 25 basis point rate cut in June to 69% from just over 70% before the GDP numbers were released. They widely expect the BoC to hold its key overnight rate at the same level on April 10 and a rate cut in July is fully priced in.
The Canadian dollar pared losses after the numbers, with the loonie trading 0.01% stronger to 1.3579 against the greenback at 1340 GMT. The two-year government bond yields also rose by 4.6 basis points to 4.188%.
The strong start to the year and the forecast for February show that the GDP is likely to close the first quarter better than the BoC 0.5% growth projection.
The data “clearly suggests there is no urgency for an immediate reduction in interest rates,” Andrew Grantham, senior economist at CIBC, wrote in a note.
The central bank has maintained its key policy rate at a 22-year high of 5% since July, but BoC’s Governing Council in March agreed that conditions for rate cuts should materialize this year if the economy evolves in line with its projections.
Canada’s economy has evaded recession in the face of high interest rates which the BoC has maintained at a 22-year high of 5% for the last eight months in efforts to rein in inflation.
But high borrowing costs have nibbled at consumer spending and business investments, keeping growth largely muted. Its growth stalled in the second half of last year and GDP was flat or negative on a monthly basis in four out of the last six months of 2023.
The BoC will release new projections along with its rate announcement on April 10.
“The surprisingly healthy start to 2024 points to above-potential growth in Q1, which could make the BoC a bit less comfortable with the inflation outlook,” said Doug Porter, chief economist at BMO Capital Markets in a note, adding that a June rate cut projection will depend on the next inflation report.
Canada’s inflation rate surprisingly cooled to 2.8% in February, its slowest pace since June.
Growth in January was broad-based, with 18 out of 20 sectors expanding output in the month, Statscan said. Real estate and rental and leasing grew for the third consecutive month, as activity at the offices of real estate agents and brokers drove the gain in January, it said.
Overall, the services-producing industries grew 0.7%, while the goods-producing expanded 0.2%.
Following three consecutive monthly increases, the mining, quarrying and oil and gas extraction sector declined 1.9% in January, as two of three subsectors contracted.
