Signs of slowing economic growth could set up “fireworks” at the Bank of Canada’s interest rate decision next week, one economist says, as odds rise for the first rate cut of the cycle.
The Canadian economy managed to keep growing in the first quarter, but at a slower pace than first expected, Statistics Canada said Friday.
StatCan said real gross domestic product (GDP) grew at an annualized pace of 1.7 per cent in the first quarter of 2024.
The agency’s preliminary estimates had assumed the Canadian economy grew at an annualized rate of 2.5 per cent to start the year. That’s also below what most economists were expecting and the Bank of Canada’s latest estimates of 2.8 per cent for the quarter.
An uptick in household spending helped fuel economic growth in the first quarter, though businesses saw their inventory accumulation slow. Consumers were spending more on services in the quarter, StatCan said, particularly on rents, telecom and air transportation.
Canadians were also saving more, however, with the household savings rate reaching 7.0 per cent, the highest level in two years amid gains in disposable income.
Taken alongside Canada’s rapidly growing population, real GDP per capita declined in the first quarter of the year. That was the sixth decline in the past seven quarters, according to RBC.
On a monthly basis, StatCan said growth was essentially unchanged in March. Early estimates for April show signs of a return to growth at 0.3 per cent amid strength in the manufacturing, mining and oil and gas sectors. The agency will update those preliminary figures in June.
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StatCan also revised its earlier estimates for the fourth quarter of 2023. Following an annualized dip of 0.3 per cent in the third quarter last year, StatCan now says Canada eked out growth of just 0.1 per cent to end the year – narrowly avoiding the definition of a technical recession of two consecutive quarters of declines.
Bank of Canada set up for pivotal rate decision
The GDP report is the last major economic data point before the Bank of Canada’s interest rate decision set for June 5.
Central bank governor Tiff Macklem has said a rate cut is within the realm of possibilities, but that the decision will be based on the economic data. Inflation has continued to cool since the central bank’s latest rate decision in April, coming in at 2.7 per cent annually in that month.
Some economists reacting to the softer-than-expected GDP figures on Friday said the Bank of Canada is clear to cut next week.
BMO chief economist Doug Porter said in a note to clients Friday that, looking past the fluctuations month to month and quarter to quarter, StatCan is painting a picture of a slowing economy in Canada that’s growing “well short of potential.”
Porter said that Friday’s GDP report “modestly” increases odds for a rate cut next week.
“There are respectable arguments on both sides of the decision, but we believe the balance of evidence points to a cut,” he said.
Reuters said Friday that money markets hiked bets on a rate cut next week to 80 per cent after the GDP data release, up from 66 per cent.
The Bank of Canada might well wait to see more signs of easing in wage growth before delivering an interest rate cut, noted RSM Canada economist Tu Nguyen in a statement Friday.
But she said an interest rate hold next week would be “unnecessarily restrictive” amid signs of easing in the economy. An interest rate cut of a quarter percentage point next week would not be enough to thwart the central bank’s efforts to date in getting inflation back to the Bank of Canada’s two per cent target, Nguyen said.
“Canada’s GDP data add to the mountain of evidence that a rate cut should come next week,” she said.
On the “hold” side of the debate is TD Bank. Director and senior economist James Orlando said in a note that while data has been showing for months that the central bank is in the clear to cut rates, Macklem has not given clear enough signals that the governing council is ready to act.
“This central bank has prided itself on communicating its intentions to make changes to monetary policy ahead of an actual move. If it wants to keep up this effort of transparency and forward guidance, we expect the BoC will hold rates steady next week and use the meeting to tee-up a rate cut in July,” Orlando wrote.
“That said, expect fireworks as the BoC could go either way with this one.”
– with files from The Canadian Press, Reuters
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