Canada’s stronger-than-expected GDP progress in January may pose a problem for the Financial institution of Canada, doubtlessly complicating the timing for its anticipated rate of interest cuts.
Financial progress rose 0.6% in January, and early estimates level to a different 0.4% month-to-month rise in February, in response to figures launched by Statistics Canada.
The expansion was largely influenced by a rebound in instructional providers (+6.0%), because of the decision of public-sector strikes in Quebec, whereas goods-producing sectors have been additionally up 0.2% on the month.
Ought to the flash estimate for February maintain, BMO Chief Economist Douglas Porter famous that even a flat studying in March would end in annualized first-quarter progress of three.5%. That may be nicely above the Financial institution of Canada’s present Q1 forecast for progress of simply 0.5%.
What it means for anticipated fee lower timing
Whereas economists warning towards studying an excessive amount of into one robust month of knowledge, they agree that if the pattern continues, it’s prone to complicate the Financial institution of Canada’s coming financial coverage selections.
For now, markets proceed to anticipate the Financial institution to ship its first quarter-point fee lower as early as its June assembly. Nonetheless, bond market pricing for a June fee lower dropped from 70% to 65% following the discharge of the GDP knowledge.
“The surprisingly wholesome begin to 2024 factors to above-potential progress in Q1, which may make the BoC a bit much less comfy with the inflation outlook,” Porter wrote. “Our name for a June fee lower nonetheless hinges on the approaching CPI reviews, but when this energy in exercise is near replicated into Q2, the BoC will see a lot much less urgency to chop charges any time quickly.”
TD Economics’ Marc Ercolao mentioned the “sturdy” progress figures current a “tough problem” for the Financial institution.
“Over the previous two months, the Financial institution has acquired strong proof that inflation is cooperating, however robust GDP knowledge prints like at this time’s will hold them on their toes,” he wrote. “Market pricing remains to be hopeful of a primary rate of interest lower occurring in June, although we expect a July lower is extra possible.”
Inhabitants progress masks weak GDP per capita
In the meantime, Randall Bartlett, Senior Director of Canadian Economics at Desjardins, mentioned the Financial institution of Canada is prone to “look by” the actual GDP studying for January, because of the outsized influence of the rebound in instructional providers.
He added that robust inhabitants progress, fuelled by worldwide migration and a pointy improve within the admission of non-permanent residents, has additionally masked weak spot seen in actual GDP progress per capita, which has been on a downward pattern because the begin of the yr.
He notes that the federal authorities’s latest announcement that it’ll cut back the variety of non-permanent resident admissions—to five% of the full inhabitants from 6.2%—will “weaken this materials tailwind to each progress and inflation going ahead.”
“As such, we’re of the view that the Financial institution stays on monitor to start chopping rates of interest at its upcoming June assembly,” he mentioned.