‘No urgency’ for Bank of Canada to cut rates as economy skirts recession

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Trudeau ‘optimistic’ BoC will bring down interest rates this year
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The national economy managed to skirt a technical recession in 2023, a Statistics Canada report Thursday showed.

And while the Bank of Canada may well have achieved its coveted “soft landing” – tamping down inflation without triggering a recession – experts say signs of life in the Canadian economy could keep interest rates elevated until mid-year.

Annualized growth for real gross domestic product (GDP) in the fourth quarter remained positive at 1.0 per cent, the agency said Thursday. A rise in exports helped boost the economy while housing and business investment fell.

After the economy contracted in Q3, a positive result for Q4 means that Canada has avoided falling into a technical recession, typically defined as two consecutive quarters of negative growth.

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StatCan also revised up its previous estimate for Q3, saying now the economy contracted at 0.5 per cent rather than the steeper 1.1 per cent drop it initially reported.

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The Q4 data was above the Bank of Canada’s latest projections, which called for flat growth last quarter. Other economists had expected modest growth in the final quarter of last year, even as the national economy continues to show signs of cooling.

In December, real GDP was flat as goods-producing industries contracted and Quebec’s public sector workers’ strike weighed on growth. A preliminary estimate suggests real GDP grew by 0.4 per cent in January.

StatCan says outside of 2020, economic growth in 2023 rose at its slowest pace since 2016.

Stephen Brown, the deputy chief North America economist at Capital Economics, tells Global News that the Q4 GDP report was a “mixed one” for economists.

While annualized growth of one per cent is nothing to write home about – observers look for growth around two per cent annually as a bar of solid progress – Brown says that even small positives are big considering the expectations for the economy in 2023.

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“It’s good news in the sense that, this time last year, most economists did expect for Bank of Canada rapid rate hikes to be driving the economy into a recession,” he says.

The Canadian economy has slowed under the weight of higher interest rates as consumers rein in spending, slowing sales for businesses.

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But so far, the economy has avoided a sharp downturn, as the unemployment rate continues to hover around pre-pandemic levels.

At this juncture, Brown says it’s looking like the Bank of Canada has pulled off its elusive “soft landing” with inflation on the decline but the economy skirting a recession and substantial job losses.

It’s certainly possible that the economy could still tumble into a downturn this year, Brown says, particularly as he expects retailers to see a big drawdown in their accumulated inventories this quarter.

But with signs of growth on the horizon – the Trans Mountain pipeline is expected to come online this year, priming Canada’s oil exports for a boost – he says “the chance of a recession happening has certainly fallen quite considerably.”

What does this mean for the Bank of Canada?

Canada’s economy is “just grinding forward,” BMO chief economist Doug Porter said in a note to clients on Thursday, citing a particular boost in exports tied to strong spending trends from the United States. But he also said that growth is “nevertheless anemic” amid notable declines in business investment.

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RBC assistant chief economist Nathan Janzen said in a note that while population growth is helping to pull up the economy, on a per capita basis, real GDP declined in a sixth consecutive quarter. Household spending got a lift from a bigger population and auto sales, which StatCan said was primarily tied to the unravelling of supply chain kinks.

For the Bank of Canada, which is looking for evidence of slowing in spending and sustained downward momentum in inflation, economists say signs of life in the Canadian economic engine likely means interest rate cuts are not imminent.

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Trudeau ‘optimistic’ BoC will bring down interest rates this year

“This changes little for the Bank of Canada, as conditions don’t appear to be worsening so there’s no urgency to cut rates. With growth still well below potential, disinflationary pressure will continue, but it will require ongoing patience,” Porter wrote.

The Bank of Canada is widely expected to hold interest rates steady at its next decision on March 6.

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Economists at RBC, CIBC and TD Bank all said Thursday that the fourth quarter GDP report firms up their calls for interest rates to start falling in June.

“The bottom still isn’t falling out of the economy in a way that would push the Bank of Canada to shift quickly to looser monetary policy. But with the economy continuing to show signs of softening, inflation is still likely to drift lower rather than higher,” Janzen wrote.

Brown agrees with the June timeline for rate cuts. He tells Global News that the thorny area the Bank of Canada will need to continue watching is shelter inflation, particularly tied to rising rents.

Without the influence of mortgage interest costs, annual inflation would already be back at the Bank of Canada’s two per cent target, he notes. That tells the central bank that its job is essentially done, and Brown says policymakers just needs to decide how much weight it gives to the shelter component, which accelerated slightly to 6.2 per cent in January compared to 6.0 per cent in December.

Signs that the economy still has a pulse will give the Bank of Canada a few months to “wait and see” whether rent inflation is heading in the right direction before policymakers decide they can start easing monetary policy, he says.

“What this GDP print does is it buys the Bank of Canada a bit more time.”

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– with files from The Canadian Press

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