Economic slowdown in Canada may lead to earlier-than-expected interest rate cuts
Canadian economic growth is expected to slow in February, and RBC economists predict that the Bank of Canada will lower interest rates sooner than anticipated.
Following a strong 0.6% surge in January, preliminary estimates for February gross domestic product (GDP) show a subdued 0.1% increase.
Analysts at RBC, Nathan Janzen and Carrie Freestone, said January's growth was partially fuelled by temporary factors. The end of public sector strikes in Quebec boosted the education sector, while unusually mild weather increased utility output. These conditions are unlikely to repeat, suggesting a less robust picture for the Canadian economy.
In contrast, the US Federal Reserve is facing a different economic landscape leading up to its interest rate decision on Wednesday. American consumers continue to boost spending despite higher interest rates and inflation pressures, which have shown concerning signs of reaccelerating.
The Fed is widely expected to keep the federal funds rate unchanged this week. The policy statement likely indicates fewer interest rate cuts this year than the 75 basis points worth of declines anticipated by policymakers in March.
"US weekly jobless claims are holding at low levels, suggesting that labour market data on Friday will continue to look firm and reinforce that there is less urgency for the Fed to start pushing interest rates lower than there is for the Bank of Canada," Janzen and Freestone wrote.
RBC's Consumer Spending Tracker suggests that real retail sales in Canada declined in March, accompanied by a rise in the unemployment rate and a slight decrease in hours worked. This fading economic growth momentum, particularly when measured against rapid population growth, is consistent with RBC's assumption that the Bank of Canada will shift to interest rate cuts before mid-year.
Read next: Canada's 'crisis-level' mortgage bond buying could raise debt costs: CMHC
Looking ahead, Canada's trade data for March is expected to show a widening trade surplus, driven by higher oil prices boosting the energy trade balance. The US goods trade deficit is anticipated to have widened by $1.5 billion in March, with exports and imports slipping during the month. Additionally, the US is forecast to report a strong job market in April, with payroll employment projected to increase by 267,000 and the unemployment rate holding steady at 3.8%.
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