Canadian economy renewing growth arc, but still trailing US

The Canadian economy bounced back at the end of last year with the help of strong oil exports, giving the Bank of Canada more time to assess inflation progress before cutting rates.

Preliminary data suggest gross domestic product expanded 0.4% in January, the strongest monthly pace in a year, due to a resumption of activity after public sector strikes in Quebec ended, Statistics Canada reported Thursday in Ottawa.

That followed a flat reading in the previous month, missing expectations for a 0.2% increase in a Bloomberg survey of economists.

Overall, the economy in the fourth quarter grew at a 1% annualized pace, faster than a consensus estimate of 0.8% and the Bank of Canada’s forecast of zero growth. That’s a rebound from an upwardly revised 0.5% contraction between July and September.

Though the fourth-quarter rebound was stronger than expected, the underlying details of the report suggest an economy that continues to stall. Household consumption edged up, but three-quarters of the increase was caused by higher spending on vehicles as supply chain issues ease and back orders were fulfilled.

Population growth also is still outpacing the rise in household spending, with per-capita consumption expenditures falling for the third straight quarter. Declines in business and housing investments were some of the biggest drags — outside of the pandemic, the second half of 2023 represented the weakest half-year for business investment since 2016.

Still, the data indicates Canada is avoiding a sharp downturn, and there’s little evidence to spur the Bank of Canada into quickly considering monetary easing. Higher exports — which were driven by crude oil — as well as reduced imports fueled Canada’s economic growth in the fourth quarter.

While policymakers have shifted their discussions to how long rates need to remain restrictive, they’re still waiting for more data to confirm sustained downward momentum in underlying inflation.

“There’s nothing here that drives increased urgency to cut rates, though ongoing below potential growth will drive more disinflationary pressure,” said Benjamin Reitzes, a Canadian rates and macro strategist at Bank of Montreal, in an email. “It’s still all about inflation.”

This is the last key economic data before the Bank of Canada’s next rate decision on March 6. Since its January meeting, economic releases have been mixed, with jobs gains beating forecasts while core inflation eased more than expected and a preliminary retail sales estimate suggested a sharp pullback in spending. Economists widely expect the bank to hold policy rates steady at 5% again for a fifth straight meeting next week.

The report details suggest domestic demand remains weak, said Andrew Grantham, an economist with the Canadian Imperial Bank of Commerce, in a report to investors.

“Growth appears to have been driven largely by an easing of previous supply constraints helping exports and car sales, rather than necessarily an improvement in domestic demand,” he said. “Because of that, and given that inflation is actually running below the bank’s January monetary policy report projections, today’s data doesn’t change our forecast for a first interest rate cut in June.”

There is reason to expect the bank will wait until at least June to start cutting interest rates, wrote Stephen Brown of Capital Economics, in a report to investors.

“Providing the latest preliminary estimate is not also revised down heavily, that means the economy should probably eke out another modest expansion this quarter and reduces the chance of the Bank beginning to cut interest rates as soon as April.”

The Canadian dollar is now little changed after erasing its earlier losses while bonds have trimmed declines across the curve after the mixed data.

Canadian central bankers are also closely watching the Federal Reserve. In the United States on Thursday, the Fed’s preferred gauge of underlying inflation rose in January at the fastest pace in nearly a year.

With assistance from Erik Hertzberg and Jay Zhao-Murray.