Growth in the Canadian economy was slower than expected in the first quarter, strengthening the case for a possible interest rate cut by the Bank of Canada next week.
Statistics Canada announced Friday that the economy experienced annualized growth of 1.7% during the first three months of the year. The federal agency also revised downward its growth figures for the fourth quarter of 2023.
Statistics Canada said growth in the final three months of 2023 was at an annualized rate of 0.1%, compared to its initial estimate of 1%.
This report provides the latest major economic data ahead of the Bank of Canada’s interest rate decision next week. The central bank expected an annual growth rate of 2.8% for the first quarter.
Tu Nguyen, an economist at tax and consulting firm RSM Canada, said the GDP report, combined with other recent data, suggests to him that the Bank of Canada will cut its key interest rate by a quarter of percentage point on June 5.
“I think the economy really needs this so that the recovery can start as soon as possible,” she said in an interview.
Mme Nguyen acknowledged that the central bank could wait until July to cut rates, but she added that she believed that would keep rates at a restrictive level longer than necessary.
“I think in the previous rate announcement the bank seemed a lot more dovish and they acknowledged that inflation was now below 3%. [inflation globale et inflation sous-jacente] and that households were really suffering from the rise in rates,” she stressed.
Uncertainty remains
Overall, financial markets expect the Bank of Canada to cut its key interest rate next week, but this view is by no means universal.
James Orlando, senior economist at TD Bank, noted that the central bank prides itself on communicating its intentions to make changes to its monetary policy before taking direct action.
“If it wants to maintain this effort of transparency and forward orientation, we expect that the Bank of Canada will keep its rates stable next week and take advantage of the meeting to prepare a rate reduction in July,” wrote M .Orlando in a note.
“That said, expect fireworks because the Bank of Canada could go either way with this decision,” he warned.
Bank of Canada Governor Tiff Macklem said a rate cut was possible, but the decision would be driven by economic data.
He said the central bank saw conditions as appropriate to begin lowering its policy rate by 5%, but wanted those conditions to be sustainable to ensure inflation moved towards the bank’s 2% target. .
Annual inflation fell to 2.7% in April, compared to 2.9% in March.
0.7% jump in household spending
On Friday, Statistics Canada reported that growth in the first quarter was fueled by a 0.7% increase in household spending.
Household spending on services rose 1.1%, driven by spending on telecommunications, rent and air travel, while household spending on goods rose 0.3% in the first quarter, boosted by spending on new trucks, vans and sport utility vehicles.
Statistics Canada also reported that household final consumption expenditure, measured per capita, edged up 0.1% in the first quarter, after declining for three consecutive quarters.
The first-quarter results came as Statistics Canada said real gross domestic product remained essentially unchanged in March, following growth of 0.2% in February.
In March, the construction sector gained 1.1%, its strongest growth rate since January 2022. Meanwhile, the manufacturing sector fell 0.8%, weighed down by retooling work at several factories automotive assembly industry in Ontario.
The agency said its preliminary estimates for the April economy show growth of 0.3 percent, with increases in manufacturing, mining, quarrying, oil and gas extraction and in wholesale trade being partially offset by decreases in public services.
