Canada’s gross domestic product (GDP) demonstrated robust growth in January, surpassing expectations and indicating a promising start to the year. Data released on Thursday revealed a 0.6% expansion in the economy for January, marking its fastest growth rate in a year. Statistics Canada attributed this growth to a broad-based expansion, with education services leading the rebound, particularly benefiting from the resolution of public sector strikes in Quebec.
Moreover, preliminary estimates for February suggest another expansion, with GDP likely to have grown by 0.4%. The main contributors to this growth are expected to be the mining, quarrying, and oil and gas extraction sectors, although other industries are also likely to have made positive contributions.
Analysts had anticipated a more modest GDP growth of 0.4% for January, indicating that the actual growth exceeded expectations. December’s GDP figures were revised to show a 0.1% contraction, down from the initially reported zero growth.
Following the release of the GDP numbers, money markets slightly adjusted their expectations for a potential rate cut by the Bank of Canada (BoC). While there was a slight decrease in bets for a 25 basis point rate cut in June, the majority of analysts anticipate that the BoC will maintain its key overnight rate at the upcoming April 10 meeting, with a rate cut fully priced in for July.
The Canadian dollar strengthened marginally following the release of the GDP data, trading 0.01% stronger against the US dollar. Additionally, two-year government bond yields rose by 4.6 basis points to 4.188%.
The strong performance in January and the anticipated growth in February suggest that Canada’s GDP is likely to exceed the BoC’s projection of 0.5% growth for the first quarter of the year.
The latest data has prompted economists to reassess the urgency for an immediate reduction in interest rates, as highlighted by Andrew Grantham, senior economist at CIBC. Despite maintaining its key policy rate at a 22-year high of 5% since July, the Bank of Canada’s (BoC) Governing Council acknowledged in March that rate cuts could be warranted later this year if economic conditions align with their projections.
Canada’s economy has managed to avoid recession despite the persistently high interest rates, which have been in place for the last eight months as part of the BoC’s efforts to curb inflation. However, these elevated borrowing costs have subdued consumer spending and business investments, resulting in largely muted growth. The economy experienced stagnation in the second half of the previous year, with GDP remaining flat or negative in four out of the last six months of 2023.
The unexpectedly strong performance in the early months of 2024 suggests above-potential growth in the first quarter, potentially complicating the BoC’s assessment of the inflation outlook. Doug Porter, chief economist at BMO Capital Markets, emphasized that projections for a rate cut in June will hinge on the upcoming inflation report.
Notably, Canada’s inflation rate eased to 2.8% in February, marking its slowest pace since June. The growth in January was widespread across various sectors, with 18 out of 20 sectors witnessing an expansion in output. Among the notable sectors, real estate and rental and leasing registered growth for the third consecutive month, primarily driven by activity in the offices of real estate agents and brokers. The services-producing industries recorded a 0.7% growth, while the goods-producing sector expanded by 0.2%.