Rate cuts in June or July? What economists are saying after the latest GDP data

Cranes are shown next to buildings under construction in Montreal, Thursday, March 14, 2024.

The pace of growth in the Canadian economy was likely slowing down through the first quarter of the year, according to early estimates Statistics Canada.

The agency estimates real gross domestic product (GDP) grew 0.6 per cent in the quarter, or 2.5 per cent on an annualized basis.

Meanwhile, February saw GDP growth slow to 0.2 per cent, coming in below StatCan’s initial estimates for a pace of 0.4 per cent. January’s pace of real GDP growth was revised lower as well to 0.5 per cent, a tick down from 0.6 per cent initially.

The entirety of the growth in February came from services-producing sectors, while goods-producing industries were essentially unchanged, the agency said.

The warehousing and transportation sectors saw “broad-based” gains in the month, led by a rebound in rail travel following a cold snap in Western Canada in January.

Air transportation saw its seventh monthly increase in February, with a 4.8 per cent growth rate marking the largest monthly increase for the sector since May 2022. Some air carriers were increasing flight capacity to Asia ahead of the Lunar New Year in February, StatCan said.

The mining, quarrying, and oil and gas extraction industries expanded for the fourth time in five months, while the utilities and manufacturing sectors contracted.

StatCan’s early estimates for March also show economic growth was essentially unchanged in the month, though the agency cautions these figures can be revised.

Official first-quarter estimates will be available at the end of May.

The tracking for 2.5 per cent annualized growth in the first quarter is just below the Bank of Canada’s own expectations for 2.8 per cent growth in the period.

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TD Bank economist Marc Ercolao said in a note to clients Tuesday morning that while Q1 is outperforming the “meagre” growth in 2023, the waning in February and March “signal this rebound is unlikely to last.”

Heading into the end of the first quarter, RSM Canada economist Tu Nguyen said that “there seems to be little steam left in the Canadian economy.”

She said in a statement Tuesday that there’s a widening “growth gap” between Canada and the United States, where the economy south of the border continues to outperform. This could put the Bank of Canada and the U.S. Federal Reserve on diverging interest rate paths, with the Canadian central bank forced to cut its benchmark interest rate sooner to avoid a steeper downturn.

“There is little reason for the Bank of Canada to keep (its) rate at five per cent any longer, as doing so would only bolster the probability of a recession,” Nguyen said.

Benjamin Reitzes, BMO’s managing director for Canadian rates & macro strategist, said the signs of slowing momentum in the latest GDP report “puts additional pressure” on the Bank of Canada to deliver a first cut to its policy rate in June. He noted that such a move is still dependent on the upcoming inflation data for April continuing to show cooling trends.

While Ercolao said money markets still appear split between whether an initial rate cut could come in June or July, he said TD Bank leans to the later date to give the central bank more time to ensure inflationary trends are “durable.”

Money markets slightly increased the odds of a rate cut in June to close to 60 per cent from 56 per cent before the release of the data, according to Reuters, while a cut in July is fully priced in.