2023-04-28 12:54:35
(Ottawa) The strong rebound in the Canadian economy at the start of the year appears to have been short-lived, as new data suggests that growth is already on a downward trajectory.
The economy grew 0.1% in February, Statistics Canada said Friday, with preliminary estimates suggesting a contraction in the economy for the month of March. These same data point to economic growth of 2.5%, on an annualized basis, for the first quarter as a whole.
Royal Bank Deputy Chief Economist Nathan Janzen pointed out that quarterly growth, compared to the past decade, showed a “respectable pace of growth” — but a nuance needs to be made.
“If you look at the monthly details, you just see that all of this increase came from January,” Janzen noted.
After a slowdown in business inventories brought growth to zero in the fourth quarter, the Canadian economy rebounded with growth of 0.6% in January.
Meanwhile, February’s figure came in below Statistics Canada’s expectations as wholesale and retail trade, as well as manufacturing, all contracted.
Real GDP growth in February was boosted by the public sector, professional, scientific and technical services, construction, and finance and insurance.
An economic slowdown has long been expected as interest rates have risen. And while some economists had predicted that this slowdown would show up sooner, the signs of weakness are now more apparent.
“After sprinting at the start of 2023, the Canadian economy had already hit a wall in March,” CIBC economist Andrew Grantham wrote in a note to clients.
The federal agency’s preliminary estimate for March suggests an economic contraction of 0.1%. The expected decline in real GDP is due to the continued decline in wholesale and retail trade, in addition to the mining and quarrying industries.
But Grantham said the new data is unlikely to change much for the outlook for the Bank of Canada, which is keeping its key interest rate steady at 4.5%, its highest level since 2007.
“Until there are clearer signs that slowing growth is also helping to dampen core inflation, the Bank of Canada will continue to lean towards higher interest rates, even if a hike ultimately not needed, and the rate cuts will only come in 2024,” Grantham predicted.
In his most recent monetary policy decision, on April 12, Mr. Macklem raised speculation surrounding a possible rate cut towards the end of the year. He felt that this did not appear to be “the most likely scenario”.
The central bank maintains its key interest rate, but fears that inflation will prove persistent, which would make a return to the 2.0% target potentially more difficult.
Inflation has slowed considerably since last summer, with annual inflation standing at 4.3% in March. The Bank of Canada expects this inflation to decline further to 3.0% by the middle of the year, but will slowly slow down to 2.0% by the end of the year. 2024.
With that in mind, the Bank of Canada’s Summary of Proceedings released earlier this week revealed that its Governing Council considered raising rates earlier in the month.
And while slowing growth is not yet enough to allay the Bank of Canada’s concerns, Janzen said “this [réduisait] the likelihood that it will have to raise rates further.
As the economy continues to slow, the labor market should feel the effects. So far, it has remained surprisingly resilient in a high interest rate environment, with an unemployment rate of 5% in March.
Mr Janzen said it might take another two to three months for a slowdown to have an impact on employment levels.
Unemployment is expected to eventually rise this year as companies facing slowing sales adjust their hiring plans.
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