Economy slows more than expected, raising hopes of Bank of Canada rate cut

‘Big picture is that Canada’s economy has expanded by a meagre 0.5% in the past year’

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The Canadian economy grew at a slower-than-expected pace in the first quarter, amid rising expectations that the Bank of Canada will cut interest rates.

The country’s gross domestic product (GDP), which measures the value of goods and services for a specific time frame, rose by 0.4 per cent in the first three months of 2024, according to Statistics Canada.

On an annualized rate, the economy expanded by 1.7 per cent, weaker than the 2.2 per cent consensus expectation and the Bank of Canada’s forecast of 2.8 per cent.

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“The big picture is that Canada’s economy has expanded by a meagre 0.5 per cent in the past year,” Bank of Montreal’s chief economist Douglas Porter said in a note on Friday. “There are respectable arguments on both sides of the decision, but we believe the balance of evidence points to a cut.”

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In April, the Bank of Canada announced its sixth consecutive hold on interest rates since the last increase in July 2023. But as the economy slows due to higher borrowing costs and inflation, many economists expect the bank to announce its first cut in either June or July. The central bank’s next meeting is on June 5.

Statistics Canada also downgraded its GDP figure for the fourth quarter of 2023 to flat from 0.2 per cent.

Measured against Canada’s growing population, the country’s per-capita GDP declined for the sixth quarter of the past seven, said Royal Bank of Canada’s assistant chief economist Nathan Jenzen.

Household spending increased by 0.7 per cent in the first quarter, primarily due to a 1.1 per cent rise in spending on telecommunications services, rent and air transport, Statistics Canada said.

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Lower spending by non-residents in Canada also contributed to the increase in overall household expenditures. On a per-capita basis, household consumption expenditures edged up 0.1 per cent in the first quarter, following three quarters of declines.

But the household savings rate reached seven per cent in the first quarter, the highest rate since the first quarter of 2022, the agency said.

Compensation for employees rose 1.5 per cent in the first quarter, after growing 0.9 per cent in the fourth quarter of 2023. Corporate incomes fell 4.9 per cent in the first quarter, after rising 2.4 per cent in the previous quarter.

The latest figures suggest “there is little reason for the Bank of Canada to wait longer to begin at least a gradual easing cycle and continue to look for a 25 basis point cut to the overnight rate next week,” Jenzen said.

Porter said that the main message from the latest readings is that the “output gap is widening, as reinforced by a less-tight job market,” which modestly increases the chances of a rate cut next week.

Toronto-Dominion Bank’s senior economist James Orlando, though, expects the Bank of Canada to hold rates next week and use the meeting to “tee-up” a rate cut in July as the bank hasn’t yet “signalled any intention” to make a move.

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But he said the odds point to more than a 70 per cent chance of a June cut, while a cut in July is “fully priced.”

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A separate report released by Statistics Canada on Friday said GDP is likely to grow in April due to positive hours worked and tepid retail sales. This puts the bank in a “tough spot,” according to Canadian Chamber of Commerce senior economist Andrew DiCapua.

“But with moderating inflation and tepid growth, there are many reasons to consider a rate cut in June,” he said.

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