Canada’s stronger-than-expected GDP development in January might pose a problem for the Financial institution of Canada, probably complicating the timing for its anticipated rate of interest cuts.

Financial development rose 0.6% in January, and early estimates level to a different 0.4% month-to-month rise in February, based on figures launched by Statistics Canada.

The expansion was largely influenced by a rebound in instructional companies (+6.0%), because of the decision of public-sector strikes in Quebec, whereas goods-producing sectors had been additionally up 0.2% on the month.

Ought to the flash estimate for February maintain, BMO Chief Economist Douglas Porter famous that even a flat studying in March would lead to annualized first-quarter development of three.5%. That may be nicely above the Financial institution of Canada’s present Q1 forecast for development of simply 0.5%.

What it means for anticipated charge lower timing

Whereas economists warning towards studying an excessive amount of into one robust month of knowledge, they agree that if the development continues, it’s prone to complicate the Financial institution of Canada’s coming financial coverage selections.

For now, markets proceed to count on the Financial institution to ship its first quarter-point charge lower as early as its June assembly. Nonetheless, bond market pricing for a June charge lower dropped from 70% to 65% following the discharge of the GDP knowledge.

“The surprisingly wholesome begin to 2024 factors to above-potential development in Q1, which might make the BoC a bit much less comfy with the inflation outlook,” Porter wrote. “Our name for a June charge lower nonetheless hinges on the approaching CPI reviews, but when this power in exercise is near replicated into Q2, the BoC will see a lot much less urgency to chop charges any time quickly.”

TD Economics’ Marc Ercolao mentioned the “sturdy” development figures current a “troublesome problem” for the Financial institution.

“Over the previous two months, the Financial institution has obtained strong proof that inflation is cooperating, however robust GDP knowledge prints like at the moment’s will maintain them on their toes,” he wrote. “Market pricing continues to be hopeful of a primary rate of interest lower taking place in June, although we predict a July lower is extra probably.”

Inhabitants development masks weak GDP per capita

In the meantime, Randall Bartlett, Senior Director of Canadian Economics at Desjardins, mentioned the Financial institution of Canada is prone to “look by means of” the true GDP studying for January, because of the outsized impression of the rebound in instructional companies.

He added that robust inhabitants development, fuelled by worldwide migration and a pointy improve within the admission of non-permanent residents, has additionally masked weak spot seen in actual GDP development per capita, which has been on a downward development because the begin of the yr.

He notes that the federal authorities’s current announcement that it’ll cut back the variety of non-permanent resident admissions—to five% of the full inhabitants from 6.2%—will “weaken this materials tailwind to each development and inflation going ahead.”

“As such, we’re of the view that the Financial institution stays on observe to start chopping rates of interest at its upcoming June assembly,” he mentioned.