Canada’s Economy Starts to Cool After Rollicking Start to 2023

The Canadian economy’s strong bounce back at the start of the year appears to have been short-lived, as new data suggests growth is on a downward trajectory. Statistics Canada said that the economy grew by 0.1% in February. Its preliminary estimates suggests real gross domestic product grew at an annualized rate of 2.5% in the first quarter, and contracted in March.

RBC assistant chief economist Nathan Janzen said the quarterly growth, compared to the last decade, is a “respectable pace of growth” — but there’s a caveat. “If you look at the monthly details, you just see that all of that increase came from January,” Janzen said.

After a slowdown in business inventories brought down growth to zero in the fourth quarter, the Canadian economy bounced back with 0.6% growth in January.

Meanwhile, February’s figure came in lower than was expected by Statistics Canada as wholesale and retail trade as well as manufacturing all contracted. Boosting real GDP in February was growth in the public sector, professional, scientific and technical services, construction and finance and insurance.

An economic slowdown has long been expected as interest rates have climbed higher. And while some economists had anticipated that slowdown to appear earlier, signs of weakness are now becoming more apparent. “After sprinting out of the gate to start 2023, the Canadian economy had already hit a wall by March,” CIBC economist Andrew Granthan wrote in a client note.

The federal agency’s preliminary estimate for March suggests the economy contracted by 0.1%. The expected dip in real GDP is driven by continued declines in wholesale and retail trade, in addition to mining and quarrying.

But Grantham said the new data shouldn’t change much for the Bank of Canada’s outlook, which is holding its key interest rate steady at 4.5%. “Until there are clearer signs that slowing growth is also helping to ease core inflation, the Bank of Canada will continue to lean toward raising interest rates, even if a hike is not ultimately needed, with rate cuts not coming until 2024,” Grantham said.

At the Bank of Canada’s last interest rate decision, governor Tiff Macklem sent a clear message to financial markets that they should not expect rate cuts in 2023. “The implied expectation in the market that we are going to be cutting our policy rate later in the year, that doesn’t look today like the most likely scenario to us,” Macklem said on April 12 at a news conference.

As the central bank continues to hold its key interest rate, it remains concerned inflation might prove to be sticky down the road, making the return to the 2% target potentially more challenging. Inflation has slowed significantly since last summer, with the annual inflation rate at 4.3% in March. The Bank of Canada expects the headline rate to fall to 3% by mid-year but a slow decline to 2% by the end of 2024.

With that in mind, the Bank of Canada’s summary of deliberations released earlier in the week revealed its governing council contemplated raising rates earlier in April. And while the slower growth isn’t enough to quell the Bank of Canada’s worries just yet, Janzen said “it lowers the odds that (it’ll) have to hike rates further.”

As the economy continues to slow, the labour market is expected to feel the effects. So far, it’s remained surprisingly strong amid high interest rates, with the unemployment rate at 5% in March.

Janzen said it can take two to three months for a slowdown to impact employment levels. Unemployment is expected to rise eventually this year, as businesses facing slowing sales adjust their hiring plans.

Source: Globe and Mail
Source: The Star
Source: Financial Post
Source: Financial Post
Source: Statistics Canada


U.S. GDP Rose at a 1.1% Pace in the First Quarter as Signs Build That the Economy is Slowing.

  • Gross domestic product rose at a 1.1% annualized pace in the first quarter, below the 2% estimate.
  • Slumping inventories and a general decline in private investment held back early year gains.
  • Inflation was higher than expected in the quarter, with the PCE price index rising 4.2% against the 3.7% estimate.

Growth in the U.S. slowed considerably during the first three months of the year as interest rate increases and inflation took hold of an economy largely expected to decelerate even further ahead. Gross domestic product rose at a 1.1% annualized pace in the first quarter, the Commerce Department reported. Economists surveyed by Dow Jones had been expecting growth of 2%. The growth rate followed a fourth quarter in which GDP climbed 2.6%, part of a year that saw a 2.1% increase.

The report also showed that the personal consumption expenditures price index, an inflation measure that the Federal Reserve follows closely, increased 4.2%, ahead of the 3.7% estimate. Stripping out food and energy, core PCE rose 4.9%, compared to the previous increase of 4.4%.

“People were still spending even despite higher prices, even despite higher inflation and a big drag that we had from inventories,” Citigroup economist Veronica Clark said. “Overall, I think it’s a relatively inflationary report, even though the headline GDP number a bit softer. All of those signs that demand is still strong and prices are still rising were very much present today.”

Like most other Wall Street forecasters, Citi expects the economy eventually to tip into recession, though Clark said the timing is uncertain. “We would have expected to see some more slowing at this point, though you’re definitely getting signs that you’re on the margin,” she said. “So it doesn’t look like we’re going to be immediately slowing into a recession. And I think this Q1 data definitely helps to confirm that, especially [since] consumption is still so strong.”

The slowdown in growth came due to a decline in private inventory investment and a deceleration in nonresidential fixed investment, the report said. The inventory slowdown took 2.26 percentage points off the headline number.

Consumer spending as measured by personal consumption expenditures increased 3.7% and exports were up 4.8%. Gross private domestic investment tumbled 12.5%.

“The U.S. economy is likely at an inflection point as consumer spending has softened in recent months,” said Jeffrey Roach, chief economist at LPL Financial. “The backward nature of the GDP report is possibly misleading for markets as we know consumers were still spending in January but since March, have pulled back as consumers are getting more pessimistic about the future.”

In other economic news, jobless claims totalled 230,000 for the week ended April 22, a decline of 16,000 and below the estimate for 249,000.

The GDP report comes as the Federal Reserve is seeking to slow an economy burdened by inflation that had been running at its highest level in more than 40 years. Though inflation has pulled back some from its peak around 9% in June 2022, it remains well above the Fed’s 2% goal. Policymakers all say inflation is still too high and will require elevated interest rates.

At the same time, growth has taken a hit from troubles in the banking sector that are likely to infect the economy ahead. Those two issues – the Fed’s rate hiking cycle and an expected credit crunch ahead – are expected to tilt the economy into recession later this year.

Consumers, though, have remained resilient and are expected to use excess savings and purchasing power to make the economic contraction short and shallow. A strong jobs market, with an unemployment rate at 3.5%, also is expected to underpin growth.

Source: CNBC