Canada’s economy grew less than expected in Q1, which raises odds of Bank of Canada interest rate cut!
Canada’s economy grew less than expected in the first quarter. Statistics Canada reported that the real Gross Domestic Product (GDP) grew at an annualized rate of 1.7%, which was below the 2.2% economists thought and the Bank of Canada’s prediction of 2.8%.
The economy saw a 0.4% growth in the first quarter of 2024, after posting no change in the fourth quarter of 2023 (revised down from 0.2%). The increase in GDP was mainly due to higher household spending on services, while slower inventory accumulations moderated overall growth. However, March saw no economic growth, following a 0.2% rise in February.
This data arrives just before the Bank of Canada’s upcoming interest rate announcement, which might result in the first rate cut since early in the COVID-19 pandemic, once the lower-than-expected expansion strengthen the likelihood of a cut on interest rates for next month.
“I think this data makes the June rate cut more likely… there are good reasons for the Bank of Canada to exercise caution around the GDP (growth) rate, wage growth and inflation expectations, but if the Bank of Canada would like to cut rates, the data supports that”, said Andrew Kelvin, head of Canadian and Global Rates Strategy at TD Securities.
Upcoming Interest Rate Cut?
Bank of Canada Governor, Tiff Macklem, has indicated that an interest rate cut is possible, depending on economic conditions. He noted that while conditions seem favorable for a rate reduction from the current 5%, it is essential to ensure sustained progress towards the bank’s 2% inflation target. The annual inflation rate dropped to 2.7% in April from 2.9% in March.
In March, the construction industry saw a 1.1% increase, its highest since January 2022, whereas the manufacturing sector declined by 0.8%, affected by retooling in Ontario’s automotive plants. The preliminary estimate for April suggests a 0.3% GDP growth, with gains in manufacturing, mining, oil and gas extraction, and wholesale trade, partially offset by decreases in utilities.
Katherine Judge, Director and Senior Economist at CIBC Capital Markets, noted that although the economy showed improvement, March’s stagnation was a concern, indicating that the earlier boost in spending did not sustain. BMO Chief Economist, Douglas Porter, commented that despite the unexpected drop in business inventories, the overall economic growth is still below potential, causing economic slack. This, along with a less-tight job market, slightly increases the chances of a rate cut next week.