‘Robust’ GDP growth to start 2024 puts Bank of Canada in tough spot: economists

The Canadian economy is outperforming expectations to start 2024, Statistics Canada data shows.

The agency said Thursday that real gross domestic product in the first month of the year rose 0.6 per cent from December, beating most economists expectations.

The ends and beginnings of some labour disruptions were creating a few one-time impacts on the economy in January, Statistics Canada said.

StatCan pointed to a rebound in education services, tied largely to the end of public sector strikes in Quebec, as driving the growth in January. The beginning of a strike by the Saskatchewan Teachers’ Federation in the month hindered growth to a degree, StatCan added.

The agency also said that an end to the Screen Actors Guild – American Federation of Television and Radio Artists (SAG-AFTRA) strike in November meant that film and TV production in Toronto and Vancouver picked back up in January, driving growth in this sector.

Canada’s real estate, rental and leasing sector meanwhile grew for the third consecutive month. Higher sales in Ontario’s Golden Horseshoe area were responsible for the gains, StatCan said.

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The manufacturing industry in January also fully offset declines seen in December, StatCan said. Output from the automotive sector snapped a four-month streak of declines as production resumed at some auto assembly plants at the start of the year.

Oil and gas extraction was down in January, tempering gains for the overall economy.

Initial estimates show real GDP is expected to have kept growing at a clip of 0.4 per cent monthly in February, though StatCan cautions that those early readings can be revised.

With signs of a strong start to the year, real GDP is tracking for an annualized gain of 3.5 per cent in the first quarter, well above the Bank of Canada’s expectations for 0.5 per cent.

BMO chief economist Doug Porter said in a note to clients Thursday morning that the early signs of growth could prove to be a “statistical illusion.” The economy was off to a hot start this time last year amid a similarly mild winter, he notes, but effectively stalled through the rest of 2023.

The country narrowly avoided falling into a technical recession in 2023, according to StatCan data.

Economic growth has been slowing nationally amid higher interest rates from the Bank of Canada aimed at taming inflation.

Inflation has shown signs of slowing – dropping to 2.8 per cent annually in February – but the Bank of Canada is looking for signs growth is still cooling as it weighs whether or not interest rates need to remain elevated. Policymakers have also said they do not want to leave rates high for too long and risk a worse economic outcome.

Porter said that the economy’s “surprisingly healthy” start to 2024 could make the Bank of Canada a “bit less comfortable with the inflation outlook.”

BMO is maintaining its call for interest rate cuts to begin in June, though Porter notes that signs of similar economic strength in the second quarter would give the central bank “much less urgency to cut rates any time soon.”

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CIBC senior economist Andrew Grantham also said Thursday that the January GDP figures give the Bank of Canada “no urgency” to ease its policy rate. He said in a note to clients however that much of the growth seems to be tied to the lifting of supply constraints rather than fresh spending demand from Canadians that would fuel inflation.

TD Bank economist Marc Ercolao said in a note he is less convinced of a spring rate cut, calling the January growth figures “robust” and a “more difficult challenge” for the Bank of Canada.

“Over the past two months, the Bank has received solid evidence that inflation is cooperating, but strong GDP data prints like today’s will keep them on their toes. Market pricing is still hopeful of a first interest rate cut happening in June, though we think a July cut is more likely,” Ercolao wrote.

Money markets slightly trimmed their bets for a first 25 basis point rate cut in June to 69 per cent from just over 70 per cent before the GDP numbers were released, according to Reuters.

The Bank of Canada is widely expected to hold its key rate steady at its next decision on April 10 and a rate cut in July is fully priced into the markets. The central bank will also release revised forecasts for inflation and the economy at its April policy decision.

– with files from Reuters