Canada’s central bank is going to be more comfortable holding off on rate cuts. Statistics Canada (Stat Can) data shows real gross domestic product (GDP) surged in January, defying analyst expectations. Over just two months, 2024’s growth is already equivalent to all growth seen in 2023. However, it’s not clear how the momentum continues since most of the growth was driven by the public sector.
Canada’s Economy Grew Much Faster Than Expected
Canada’s economy is expanding much faster than analysts have anticipated. Real GDP grew 0.6% in January, rising 50% more than last month’s preliminary data had suggested. The agency’s preliminary data estimates 0.4% growth for February. It may be hard to appreciate just how large this was without context, but it was huge.
“To put that two-month flurry of growth into perspective, the combined 1.0% gain is as much as the economy grew in the entire 12 months of 2023,” explained Douglas Porter, chief economist at BMO.
If the current data holds, real GDP forecasts will require significant upward revisions. If February is confirmed and March is flat, he estimates annualized growth will reach 3.5% for Q1. That could make Canada the fastest growing economy in the G7, though the bank wasn’t sold on the need for revisions yet.
He adds the caveat, “Of course, this hinges on whether a) the February strength is confirmed, and b) that the early-year strength is not simply a statistical illusion.”
Growth Factors Due Primarily To Temporary Drivers
That’s not just economists playing devil’s advocate. The latest data is primarily making large, volatile movements due to temporary factors when it comes to both growth and downward pressures.
January growth was driven by the Public Sector (+1.9%), representing 0.4 points of the 0.6 points of growth. The segment includes education, healthcare, social assistance, and public administration. The end of Quebec’s public sector strike drove most of the growth in January, emphasized by the drag it produced in the two months prior.
Public Sector Drove Canadian GDP Growth
Main industrial sectors’ contribution to the percent change in gross domestic product in January
Source: Statistics Canada.
The second-largest growth pressure was manufacturing (+0.9%) in January. Stat Can attributed this largely to transportation equipment manufacturing. Autoworkers resumed activity after a partial shutdown due to retooling of equipment.
On the flip side, temporary factors also provided downward pressure for real GDP. The largest-decline was seen in Mining, Quarrying, and Oil & Gas (-1.9%), following record growth in December. A decline may present concern, but not if it’s just balancing a year-end move a few week’s prior.
Bank of Canada May Be More Comfortable With Rate Cut Delays
Canada’s bigger-than-anticipated growth is likely to have a mixed reception at the Bank of Canada (BoC). Growth is much higher than their forecast, lightening any pressure they may feel to make premature cuts to interest rates. At the same time, they may consider this “transient” growth, and might be right this time.
“The surprisingly healthy start to 2024 points to above-potential growth in Q1, which could make the BoC a bit less comfortable with the inflation outlook. Our call for a June rate cut still hinges on the coming CPI reports, but if this strength in activity is close to replicated into Q2, the BoC will see much less urgency to cut rates any time soon,” explained Porter.
