The Canadian economy posted bang-up growth in the first three months of 2017, increasing the chance that the Bank of Canada (BoC) will raise interest rates sooner rather than later.
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Real GDP expanded by a whopping 3.7 per cent between January and March, according to Statistics Canada data released Wednesday. That pace is “well above any other major economy at this point,” according to BMO chief economist Douglas Porter.
BMO’s official forecast has the first interest hike happening in April of next year, but Porter sees a possibility that rates will move as early as late 2017.
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Trading activity on financial markets indicates investors believe there’s a 25 to 30 per cent chance of a hike before the end of the year, he added.
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The BoC sets the key interest rate that affects the general level of interest rates in Canada. A rate hike would quickly push up the interest Canadians pay on financial products like lines of credit and variable-rate mortgages. In the long-run, it would make borrowing and carrying debt more expensive across the board.
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Here are some of the details from the GDP release that could strengthen the case for raising rates as early as this year:
Business investment is starting to rebound
Although the numbers indicate that the housing market and consumer spending continue to play a big role in pumping Canada’s GDP numbers, business investment was also up. It rose a solid 10.3 per cent annualized, with the majority of firms’ spending going toward machinery and equipment.
Business investment is generally seen as a much more reliable source of economic growth than the housing market or debt-fuelled household consumption, and Canada’s central bank has long been worried about lacklustre spending by Canadian firms.
Today’s business investment numbers are “a nice step in the right direction,” said Porter.
Still, the increase came after Canadian business trimmed their investments by 22 per cent in the last three months of 2016.
The increase seen in the first three months of 2017 “reversed only half of that decline,” Porter noted.
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Prices rising rapidly
GDP prices were up 3.1 per cent year over year, Porter wrote in a research note this morning, using a measure of inflation that reflects prices paid by both Canadian consumers and Canadian businesses.
Although the BoC focuses mostly on consumer price inflation, which rose 1.6 per cent year over year in April, GDP prices matter as well.
The central bank uses interest rates to keep inflation in check, so rising price levels are another factor that could increase the probability of an earlier rate hike.
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Import surge possibly not as bad as it looks
The new GDP numbers also offered a glass-half-full reading on Canada’s trade balance.
Canada’s recent surge in imports matched a heavy buildup in businesses inventory, which could indicate Canadian firms won’t need to buy quite as much from abroad in coming months, Porter told Global News.
Imports count against GDP numbers. Canada saw a 13.7 per cent annualized jump in imports in the first three months of the year, while exports lagged, resulting in a trade deficit.
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March GDP numbers bode well for growth going forward
Statistics Canada also published GDP growth numbers for the month of March, which came in ahead of estimates.
“This GDP series actually ended with a much better than expected March, with a 0.5 per cent gain helped by a big number for manufacturing,” reads a research note by CIBC chief economist Avery Shenfeld.
That should make for a solid handoff for the second quarter of the year, which runs from April to June.
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