Canada's GDP growth spurs BoC caution

Economists divided on central bank's next move as economy shows signs of weakness

Canada's GDP growth spurs BoC caution

Canada's economy grew at a slow pace in the fourth quarter of 2024, avoiding a technical recession but likely not convincing the Bank of Canada to cut interest rates imminently.

Statistics Canada's latest report revealed that the country's gross domestic product (GDP) increased by 1% annually at the tail end of 2024, rebounding from a 0.5% contraction in the previous quarter.

Economists offered mixed reactions to the news, with some predicting the BoC will wait until summer before cutting rates, while others believe the central bank should act sooner.

HSBC Canada chief economist David Watt said that the BoC will likely hold off on rate cuts until summer: “We seem to be heading towards rate cuts and easing inflationary pressures, but at the same time, the Bank of Canada can't declare victory yet because companies still might find with labour costs going up, they have to pass through some price increase,” he told BNN Bloomberg.

Meanwhile, TD Bank senior economist James Orlando acknowledged that while growth in the quarter was widely anticipated, the actual level of growth exceeded expectations. He emphasized the persistent impact of high interest rates on economic growth, noting, “The narrative on the Canadian economy remains the same: high interest rates are weighing on economic growth.”

Orlando highlighted that Canada's GDP contracted, while GDP per capita has declined in five of the last six quarters when excluding international factors. He anticipates the BoC’s first rate cut to occur in June.

However, Colin White, CEO and portfolio manager at Verecan Capital Management, expressed scepticism that the BoC will wait until June to cut rates.

“There is an argument to be made that the Bank of Canada should be, and will, pay more attention to the Canadian weakness and be motivated to cut rates rather than be comfortable missing a recession relying on the strength in the U.S.,” White said in a Bloomberg interview.

“Strong jobs numbers, inflation under 3% and positive GDP is not a bad combination, if this was offered as an outcome a few months ago many economists would have happily taken the offer. Very much feels like a soft landing right now, but the story is not over.”

When it comes to monthly fluctuations, December saw flat growth, with early projections indicating a 0.4% increase. Watt said that the volatile monthly data is insufficient for the BoC to make rapid decisions.

“Is it slowing enough to prompt an early Bank of Canada rate cut? No. Is it going strong enough to suggest that maybe the bank has to hike rates? No,” Watt said.

“[BoC] is sitting on the sidelines, waiting to see how things evolve until conditions are in place for the bank to start cutting interest rates, which again looks like around mid-year.”

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