Canada’s stronger-than-expected GDP progress in January may pose a problem for the Financial institution of Canada, probably 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 accordance with figures launched by Statistics Canada.
The expansion was largely influenced by a rebound in instructional providers (+6.0%), as a result of 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 lead to annualized first-quarter progress of three.5%. That may be effectively above the Financial institution of Canada’s present Q1 forecast for progress of simply 0.5%.
What it means for anticipated charge lower timing
Whereas economists warning towards studying an excessive amount of into one robust month of knowledge, they agree that if the development continues, it’s more likely 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 charge lower as early as its June assembly. Nonetheless, bond market pricing for a June charge 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 snug with the inflation outlook,” Porter wrote. “Our name for a June charge lower nonetheless hinges on the approaching CPI experiences, but when this power 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 stated 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 maintain them on their toes,” he wrote. “Market pricing continues to be hopeful of a primary rate of interest lower occurring in June, although we predict a July lower is extra doubtless.”
Inhabitants progress masks weak GDP per capita
In the meantime, Randall Bartlett, Senior Director of Canadian Economics at Desjardins, stated the Financial institution of Canada is more likely to “look by means of” the actual GDP studying for January, as a result of outsized affect 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 development because the begin of the yr.
He notes that the federal authorities’s latest announcement that it’ll scale back the variety of non-permanent resident admissions—to five% of the entire 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 observe to start chopping rates of interest at its upcoming June assembly,” he stated.
