‘No urgency’ for Bank of Canada to cut rates as economy skirts recession

The Bank of Canada will announce its interest rate decision this morning as economists widely expect the central bank to opt for a quarter percentage point rate hike. The Bank of Canada is shown in Ottawa on Tuesday, July 12, 2022.

The national economy managed to skirt a technical recession in 2023, according to Statistics Canada.

Annualized growth for real gross domestic product (GDP) in the fourth quarter remained positive at 1.0 per cent, the agency said Thursday. A rise in exports helped boost the economy while housing and business investment fell.

After the economy contracted in Q3, a positive result for Q4 means that Canada has avoided falling into a technical recession, typically defined as two consecutive quarters of negative growth.

StatCan also revised up its previous estimate for Q3, saying now the economy contracted at 0.5 per cent rather than the steeper 1.1 per cent drop it initially reported.

The Q4 data was above the Bank of Canada’s latest projections, which called for flat growth last quarter. Other economists had expected modest growth in the final quarter of last year, even as the national economy continues to show signs of cooling.

StatCan says outside of 2020, economic growth in 2023 rose at its slowest pace since 2016.

The Canadian economy has slowed under the weight of higher interest rates as consumers rein in spending, slowing sales for businesses.

But so far, the economy has avoided a sharp downturn, as the unemployment rate continues to hover around pre-pandemic levels.

In December, real GDP was flat as goods-producing industries contracted and Quebec’s public sector workers’ strike weighed on growth. A preliminary estimate suggests real GDP grew by 0.4 per cent in January.

Canada’s economy is “just grinding forward,” BMO chief economist Doug Porter said in a note to clients on Thursday, citing a particular boost in exports tied to strong spending trends from the United States. But he also said that growth is “nevertheless anemic” amid notable declines in business investment.

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RBC assistant chief economist Nathan Janzen said in a note that while population growth is helping to pull up the economy, on a per capita basis, real GDP declined in a sixth consecutive quarter. Household spending got a lift from a bigger population and auto sales, which StatCan said was primarily tied to the unravelling of supply chain kinks.

For the Bank of Canada, which is looking for evidence of slowing in spending and sustained downward momentum in inflation, economists say signs of life in the Canadian economic engine likely means interest rate cuts are not imminent.

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“This changes little for the Bank of Canada, as conditions don’t appear to be worsening so there’s no urgency to cut rates. With growth still well below potential, disinflationary pressure will continue, but it will require ongoing patience,” Porter wrote.

The Bank of Canada is widely expected to hold interest rates steady at its next decision on March 6.

Economists at RBC, CIBC and TD Bank all said Thursday that the fourth quarter GDP report firms up their calls for interest rates to start falling in June.

“The bottom still isn’t falling out of the economy in a way that would push the Bank of Canada to shift quickly to looser monetary policy. But with the economy continuing to show signs of softening, inflation is still likely to drift lower rather than higher,” Janzen wrote.

– with files from The Canadian Press