Pressure building on Bank of Canada: What economists say about slowing GDP

‘Momentum in the Canadian economy appears to have faded quickly’

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Statistics Canada is predicting gross domestic product growth will be flat in March after data released Tuesday showed the Canadian economy slowed more than expected in February.

On a month-over-month basis, GDP was up just 0.2 per cent in February, missing analyst estimates for growth of 0.3 per cent and the data agency’s advance estimate of 0.4 per cent. Year over year, GDP grew 0.8 per cent, well off expectations for a 1.1 per cent expansion.

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The national data agency also revised January GDP growth down to 0.5 per cent from 0.6 per cent.

Here’s what economists are saying the latest numbers mean for the economy, the Bank of Canada and the path of interest rates.

Slowing momentum: CIBC

“Momentum in the Canadian economy appears to have faded quickly as the first quarter progressed,” Andrew Grantham, an economist with CIBC Economics, said in a note.

Despite the slowdown, Grantham estimates that the economy is on track to grow at a 2.5 per cent annualized rate in the first quarter — close to the Bank of Canada latest estimate of 2.8 per cent.

However, the end-of-quarter weakness could bleed into the second quarter, Grantham warned, posing risks for the central bank’s estimate of 1.5 per cent annualized growth.

“We always suspected that strength at the start of the year largely reflected an easing of previous supply constraints and the effects of better-than-normal winter weather, and that the economy could stall again thereafter,” Grantham said. “Today’s data appear to support that view.”

If the second quarter starts out sluggishly and inflation remains in check, “the Bank of Canada should start gradually reducing interest rates at the June meeting,” he said.

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Rate cut in June: Desjardins

“The slowdown in growth isn’t surprising, given that January’s increase was buoyed by one-off factors,” Royce Mendes, managing director and head of macro strategy at Desjardins Group, said in a note.

Mendes is forecasting first-quarter annualized growth of 2.2 per cent and 1.5 per cent in the second quarter, mirroring the Bank of Canada’s estimate.

“As a result, we continue to see the Bank of Canada beginning a rate-cutting cycle in June,” he said.

‘Eerily similar’: BMO

“The start of 2024 looks eerily similar to 2023,” Benjamin Reitzes, macro strategist at BMO Capital Markets, said in a note.

In 2023, GDP burst from the starting gate in the first quarter, only to fizzle out.

The first three months of the year look “decent” to Reitzes, but for him the bigger story is “the apparent loss of momentum.”

“That puts additional pressure on the BoC to begin cutting as soon as June,” he said, though he cautions that decision will ultimately depend on the next consumer price index report due on May 21.

There was one other complicating factor, Reitzes said.

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“Unfortunately, persistently strong U.S. data are making things increasingly complicated for the bank, as it appears that the Fed (U.S. Federal Reserve) could be on hold for a while.”

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‘Unlikely to last’ : TD Bank

“The deceleration in February and March signal this rebound is unlikely to last,” Mark Ercolao, an economist with Toronto-Dominion Economics, said in a note, referring to estimates for annualized growth in the first quarter of 2.5 per cent.

“This should encourage the Bank of Canada, which needs to make sure inflation is on a sustainable path back to two per cent,” Ercolao said, noting that markets are currently split between a first cut in June and July.

TD believes the bank will move in July, “as it will give the bank slightly more time to ensure that inflationary trends are durable.”

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