Canada’s economy has lost momentum after a blistering start to the year, reinforcing economists’ expectations that the Bank of Canada is on track to cut its key rate in the coming months.
Real gross domestic product (GDP) grew by 0.2% in February in the country, according to Statistics Canada on Tuesday. This follows a 0.5% gain in January.
“Today’s GDP report confirmed our expectations that the increase in output in January was temporary and in no way marked an inflection point for Canada’s growth environment which remains very weak,” analyzes Claire Fan, economist at RBC, in a note to clients.
In its preliminary estimate, Statistics Canada indicated that real GDP remained essentially unchanged in March.
According to its preliminary figures, the Canadian economy experienced annualized growth of 2.5% in the first quarter of 2024.
Although the economy continues to grow, economists say the latest data reinforces the idea that growth is slow because rising interest rates weigh on spending decisions by consumers and businesses.
This will likely be good news for the Bank of Canada, which is looking for lasting evidence that the economy and inflation are responding to rising interest rates.
Governor Tiff Macklem said earlier this month that the central bank already sees ideal conditions to begin lowering its policy rate, which is currently at 5%. However, he wants these conditions to be maintained to ensure that inflation is indeed moving towards the bank’s 2% target.
“The loss of momentum as the quarter progressed is the most important takeaway from this report. This increases pressure on the Bank of Canada to begin cutting rates in June,” wrote Benjamin Reitzes, managing director and Canadian rates and macroeconomics strategist at BMO.
The slowdown in the Canadian economy is also evident in the labor market, where job creation has lagged behind population growth. In March, the unemployment rate jumped to 6.1%.
Mr. Reitzes, however, warned in his note to clients that a June rate cut still depends on April inflation data, which is expected to be released in a few weeks.
Canada’s inflation rate stood at 2.9% in March, up slightly from the previous month.
Increase for more than half of sectors
Overall, 12 of the 20 sectors monitored by Statistics Canada posted an increase in February.
The economic expansion occurred as service-producing industries grew 0.2%.
February’s advance was largely attributable to a 1.4% increase in the transportation and warehousing sector, which saw its highest monthly growth rate since January 2023.
This sector was helped by the recovery in rail transport (+5.5%), as activity returned to normal following the extreme cold snap that occurred in January in Western Canada.
Also, air travel grew 4.8% in February, its highest growth rate since May 2022, as carriers added more flights to Asia to meet demand ahead of the New Year lunar.
Statistics Canada reported that goods-producing industries were essentially unchanged.
The mining, quarrying and oil and gas extraction sector grew 2.5% in February. Oil and gas extraction rose 3.3%, partly offsetting a contraction in January. Extractive industries (excluding oil and gas) increased by 1.9%.
The utilities sector was one of those that declined, falling 2.6% in February. The manufacturing sector also fell 0.4%.