(Ottawa) The Canadian economy appears to have finished 2023 on a stronger note than expected, which economists say could delay the time when interest rates begin to fall this year.
Statistics Canada revealed Wednesday that real gross domestic product (GDP) increased by 0.2% in the country last November, marking the first expansion in six months.
A preliminary estimate suggests that real GDP increased by 1.2% on an annualized basis in the fourth quarter, following a decline of similar magnitude in the third quarter.
According to Statistics Canada, this would bring economic growth to 1.5% in 2023.
These figures exceed Bank of Canada forecasts. This forecast growth of 0.7% in the fourth quarter and 1% for 2023.
The Canadian economy has slowed over the past year as rising borrowing costs weigh on consumer spending and business investment. However, so far it has avoided a recession.
Bank of Montreal chief economist Douglas Porter said stronger-than-expected numbers released Wednesday suggest economic forecasts for 2024 may need to be revised upwards.
This also means the Bank of Canada can take its time before cutting interest rates.
“This strong result, after a long period of growth scarcity, provides policymakers with the opportunity to gently push back discussions until underlying inflation falls further,” Mr. Porter wrote in a note to customers.
However, economists are interpreting Wednesday’s report with some caution and continue to expect the economy to show signs of weakness in the coming months.
Although Statistics Canada provides an overview of what it expects in its preliminary estimates, the final results can often differ significantly.
Claire Fan, an economist at RBC, says this is one reason why the publication should be taken with a “grain of salt.”
She added that the increase in real GDP in November was due to one-off factors such as the recovery from factory closures in the manufacturing sector.
“You shouldn’t really interpret this as a turnaround in, say, overall demand and consumer activity towards the end of 2023,” she says.
The federal agency observed that overall, 13 of 20 industries showed growth in November. Most of it was attributable to a 0.6% rise in goods-producing industries, which posted their strongest advance since January of last year.
Activity in service-producing industries recorded a slight increase of 0.1%, despite the repercussions of strikes called during the month in the public sector in Quebec.
The Bank of Canada and private sector economists expect economic growth to remain moderate for the first half of 2024 before rebounding in the second half.
Weaker growth, accompanied by lower inflation, should pave the way for interest rate cuts. Financial markets estimate that the first rate cut could occur as early as April.
According to Mme Fan, RBC still expects the central bank to begin lowering its key rate in June.
“Rising rates have put significant downward pressure on consumer spending. This is still the case and will continue to be the case if rates remain high during the first half of this year,” she analyzes.
When the policy rate was last decided, Gov. Tiff Macklem said board discussions focused on how long the rate should remain at the current level.
The central bank’s key interest rate currently stands at 5%, its highest level since 2001.