Canada’s stronger-than-expected GDP development in January may pose a problem for the Financial institution of Canada, probably complicating the timing for its anticipated rate of interest cuts.

Financial development rose 0.6% in January, and early estimates level to a different 0.4% month-to-month rise in February, in keeping with figures launched by Statistics Canada.

The expansion was largely influenced by a rebound in academic companies (+6.0%), because of the decision of public-sector strikes in Quebec, whereas goods-producing sectors have been additionally up 0.2% on the month.

Ought to the flash estimate for February maintain, BMO Chief Economist Douglas Porter famous that even a flat studying in March would end in annualized first-quarter development of three.5%. That might be effectively above the Financial institution of Canada’s present Q1 forecast for development of simply 0.5%.

What it means for anticipated price lower timing

Whereas economists warning towards studying an excessive amount of into one sturdy month of information, they agree that if the pattern continues, it’s prone to complicate the Financial institution of Canada’s coming financial coverage selections.

For now, markets proceed to anticipate the Financial institution to ship its first quarter-point price lower as early as its June assembly. Nonetheless, bond market pricing for a June price lower dropped from 70% to 65% following the discharge of the GDP knowledge.

“The surprisingly wholesome begin to 2024 factors to above-potential development in Q1, which may make the BoC a bit much less snug with the inflation outlook,” Porter wrote. “Our name for a June price lower nonetheless hinges on the approaching CPI stories, but when this energy in exercise is near replicated into Q2, the BoC will see a lot much less urgency to chop charges any time quickly.”

TD Economics’ Marc Ercolao mentioned the “sturdy” development figures current a “tough problem” for the Financial institution.

“Over the previous two months, the Financial institution has acquired stable proof that inflation is cooperating, however sturdy GDP knowledge prints like immediately’s will hold them on their toes,” he wrote. “Market pricing remains to be hopeful of a primary rate of interest lower taking place in June, although we predict a July lower is extra possible.”

Inhabitants development masks weak GDP per capita

In the meantime, Randall Bartlett, Senior Director of Canadian Economics at Desjardins, mentioned the Financial institution of Canada is prone to “look by” the true GDP studying for January, because of the outsized influence of the rebound in academic companies.

He added that sturdy inhabitants development, fuelled by worldwide migration and a pointy improve within the admission of non-permanent residents, has additionally masked weak spot seen in actual GDP development per capita, which has been on a downward pattern for the reason that begin of the yr.

He notes that the federal authorities’s current announcement that it’s going to scale back the variety of non-permanent resident admissions—to five% of the full inhabitants from 6.2%—will “weaken this materials tailwind to each development and inflation going ahead.”

“As such, we’re of the view that the Financial institution stays on observe to start reducing rates of interest at its upcoming June assembly,” he mentioned.