The Canadian economy is showing signs of slowing growth in the first quarter of the year, with Statistics Canada estimating a 0.6% increase in real gross domestic product (GDP) for the quarter. This translates to a 2.5% annualized growth rate, slightly below the Bank of Canada’s expectations. The pace of growth has been decreasing, with February seeing GDP growth slow to 0.2%, below initial estimates, and January’s growth also revised down to 0.5%. The growth in February was primarily driven by services-producing sectors, while goods-producing industries remained stagnant. Sectors such as warehousing, transportation, and air travel experienced growth during the month, with some air carriers increasing flight capacity ahead of the Lunar New Year.
The mining, quarrying, and oil and gas extraction industries expanded for the fourth time in five months, while the utilities and manufacturing sectors contracted. Early estimates for March suggest that economic growth remained flat, although these figures are subject to revision. Official first-quarter estimates will be released at the end of May, with the current estimate of 2.5% annualized growth falling slightly below the Bank of Canada’s expectations. Economists warn that the slowdown in growth seen in February and March may indicate that the current rebound in the economy is unlikely to persist.
Despite the recent slowdown in growth, there is little momentum left in the Canadian economy, according to RSM Canada economist Tu Nguyen. She notes a growing “growth gap” between Canada and the United States, with the U.S. economy continuing to outperform. This discrepancy could lead to diverging interest rate paths for the Bank of Canada and the U.S. Federal Reserve, potentially forcing the Canadian central bank to cut its benchmark interest rate sooner to prevent a more severe economic downturn. Analysts like Benjamin Reitzes from BMO believe that the signs of slowing momentum in the latest GDP report may increase pressure on the Bank of Canada to implement a rate cut in June, although such a move would depend on upcoming inflation data.
The possibility of a rate cut from the Bank of Canada has led to speculation among economists and money markets, with predictions split between June and July for the timing of the potential cut. TD Bank leans towards a later date to allow the central bank more time to ensure that inflation trends are sustainable. Despite the uncertainty surrounding the timing of a rate cut, the overall sentiment is that the signs of slowing growth in the Canadian economy are prompting discussions about potential monetary policy adjustments. As the economy continues to show signs of weakness, it will be crucial for policymakers to carefully monitor economic indicators and adjust interest rates accordingly to support sustainable growth.
