Canada’s economy is showing signs of underlying strength as some consumers and businesses brush off recession fears, a flurry of data releases on Friday suggest.
Some economists say the door is open for the Bank of Canada to pause its rate hike cycle once again amid easing inflation concerns and an expected economic slowdown in the second half of the year, while others feel it’s still too soon for the central bank to declare victory.
The country’s GDP growth was “essentially unchanged” in April, according to Statistics Canada’s report on for the month, revised down from early estimates for 0.2 per cent growth in the month.
Drags from the public sector strike and a slowdown in manufacturing were offset by strength in the mining and oil and gas sectors, StatCan said. The real estate industry, too, pulled up GDP as the housing market continue its spring rebound.
Statistics Canada also revised up its earlier estimate for March, swinging the month’s GDP to a modest gain of 0.1 per cent compared to a slight dip of 0.1 per cent.
Statistics Canada’s flash estimate for May shows 0.4 per cent GDP growth is expected for the month. But that number could be revised.
Where is the recession?
Capital Economics’ deputy chief North America economist Stephen Brown tells Global News that, stripping the impact of the strike from the GDP data, the economy likely would have grown roughly 0.1 per cent in April.
Add that to early estimates of a solid rebound in May, and Brown says “it’s a sign the economy is enjoying some renewed momentum.”
BMO chief economist Doug Porter said in a note Friday morning that despite calls for a slowing in Canada’s economy this year, the country has not posted a single month of negative growth so far in 2023.
Even one of the largest strikes in years couldn’t drag the country’s economy into a contraction, he noted, suggesting the Bank of Canada’s rapid interest rate hikes over the past year and expectations of a global slowdown in demand have not meaningfully slowed Canada’s momentum.
“The bigger picture is that the Canadian economy is managing to keep its head above water in the face of many challenges,” he said.
BMO revised up its GDP expectations for the second quarter of the year to 1.5 per cent in the face of Friday’s data, up from 0.8 per cent earlier.
CIBC senior economist Andrew Grantham said in a note to clients shortly after the GDP release on Friday that the second quarter of the year is tracking for annualized growth of 1.4 per cent, just above the Bank of Canada’s forecast of 1.0 per cent in the period.
Brown noted that surging population growth is responsible for much of Canada’s GDP strength. The country set a record for immigration in the first quarter of the year, which is helping population growth outpace GDP growth, he says.
That’s a sign that the Bank of Canada’s efforts to slow demand in the economy is having an impact on a per capita basis — affecting individual households — but not weakening the overall economy as much as expected, Brown argues.
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“We are seeing weakness. The economy is weakening on a per person basis,” he says.
“It’s just because the aggregate is growing by so much because so many people are coming into the country. But that’s what’s determining the overall GDP picture.”
Tuan Nguyen, economist with RSM Canada, said in a note on Friday that the economic strength in the first two quarters of the year will push the predicted recession to the latter half of 2023.
Brown says that the economy keeps surprising analysts, and as a result, recession calls keep being delayed quarter-by-quarter.
The signs of growth in the May flash estimate will likely push these forecasts out further, he adds, with his call for a recession now timed to begin no sooner than the fourth quarter of the year — if it happens at all.
“The chance of a recession looks a lot lower than it did nine months ago,” Brown says.
Fewer businesses, consumers expect recession
The Bank of Canada, meanwhile, released another pair of reports on Friday morning that provide insights into sentiments around the economy: the business outlook survey and its survey of consumer expectations.
The Bank of Canada’s business outlook sentiment marker declined for the sixth consecutive quarter, according to the survey. The central bank says the drop suggests an overall decline in business confidence but also signals less inflationary pressure.
Businesses are expecting weaker wage growth in the next 12 months, the first time the survey has shown an expected slowdown here since the start of the pandemic.
Although cost pressures on business owners are showing signs of easing, businesses have not returned to their pre-pandemic price-setting behaviours, the Bank of Canada noted.
“Several firms are still planning to make larger and more frequent price increases in the coming year than they usually would. The continuation of higher-than-normal price growth is tied mainly to lags in the pass-through of previous increases in input prices, which is not yet complete,” the Bank explained.
Despite indications that businesses are largely expecting slower growth and plan less investment in the months ahead, the Bank of Canada surveys also show fewer business owners are expecting a recession to hit the economy.
Roughly a third of all respondents to the business survey said they are planning for a recession, down from half in the previous quarter.
Businesses expect consumer demand will pick up with more certainty in the Bank of Canada’s interest rate path — though it’s key to mention here that the surveys were done in May, before the central bank’s June 7 rate hike.
On the consumer side, households remain concerned about the cost of living — especially those with mortgages set to renew in the months ahead amid the higher interest rate environment.
Half of respondents to the consumer survey still expect a recession in the coming year — that sentiment is down slightly from the previous quarter — while their confidence in the economy’s future overall has improved, the Bank of Canada notes.
“Some households are starting to think the worst is behind them,” the Bank noted in its survey.
Short-term inflation expectations were also lower in the latest surveys, but remain above the Bank of Canada’s two per cent target.
What will the Bank of Canada do next?
The central bank will be parsing the GDP data and the outlook surveys closely for signs of an expected slowdown as it mulls its next interest rate decision on July 12. The Bank of Canada surprised most observers with a 25-basis-point hike earlier this month, with some economists saying one increase won’t be enough to bring inflation back down to two per cent.
Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist, said in a note Friday that the business outlook survey showed clear signs of softening in pressures facing business such as labour constraints and supply chain kinks.
Taken together, Reitzes said there “doesn’t appear to be as much urgency to hike rates again in July,” with the final decision likely coming down to the June jobs figures released in a week.
Grantham said in his note that, barring surprises in next week’s June jobs report, CIBC is calling for a rate hold in July followed by a final quarter-percentage-point increase in September.
RBC economist Claire Fan said in a note Friday that signs of progress in the Bank of Canada surveys won’t be enough to put the central bank back on the sidelines, however.
There hasn’t been enough relief in the labour market data and this week’s inflation report for May, while it showed signs of cooling, has not seen price pressures return to pre-pandemic levels, Fan noted. RBC calls for a 25-basis-point hike on in July to bring the policy rate to 5.0 per cent before the Bank of Canada presses pause again for the remainder of 2023.
Brown says the business outlook and consumer surveys are “tricky to interpret” for members of the Bank of Canada’s governing council, and could be used to justify another hike or a pause depending on what data is being considered.
He agrees with Fan that there hasn’t been enough progress on the inflation front, especially among the Bank of Canada’s preferred core inflation figures, to warrant an end to rate hikes. And if the central bank policymakers are wont to raise rates again, he does not expect they will wait to September to do so.
After a busy week of economic releases, however, Brown says the latest data might have given the Bank of Canada more room to pause than first expected.
“My confidence in the view that the Bank will hike in July is certainly lower than it was this time last week,” he says.
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