Canada’s economy got a lift late last year. Why that might delay rate cuts

Canada’s flatlining economy showed signs of life heading into the end of 2023.

While data released from Statistics Canada Wednesday indicates the country may have avoided a recession, the bad news is that might push back the timeline for interest rate cuts.

The agency reported that real gross domestic product rose 0.2 per cent in November, thanks largely to strength in goods-producing sectors.

Manufacturing and wholesale trade saw growth in the month, and the transportation and warehousing sectors rebounded in the wake of the St. Lawrence Seaway strike dragging down the sector in October.

The Quebec public service strike meanwhile limited growth, with StatCan pointing to declines in the educational services sector tied to the work stoppages.

November marks the first month of growth since May 2023. With interest rates at the highest level seen in decades, the Canadian economy has been struggling to grow.

2:24 Business Matters: Canada’s economy stalls, again

StatCan’s initial estimates for December show a possible acceleration in growth to 0.3 per cent on a monthly basis, though these reports will be updated at the end of February.

But early signs of growth suggest Canada’s economy grew overall in the fourth quarter, potentially skirting a technical recession after a contraction in the third quarter.

Early StatCan estimates show real GDP grew at an annualized pace of 1.2 per cent in the fourth quarter, while the Bank of Canada called for essentially flat growth in its latest forecasts. Economists expect growth to remain weak in the first half of this year, before picking back up in the second half of 2024.

The central bank has been looking for signs that the economy is slowing and demand is easing to give it confidence that inflation will continue to trend back down to its two per cent target.

The Bank of Canada gave its clearest hints yet that its benchmark interest rate might have peaked last week as it delivered its fourth consecutive hold.

While conversations among economists have pivoted to when rate cuts might begin, with most calls for easing starting in the spring or summer, BMO chief economist Doug Porter said in a note to clients Wednesday that the stronger-than-expected GDP result takes some of the pressure off the Bank of Canada to start cutting before it’s sure inflation is on a sustainable path back to two per cent.

“This solid result, after a long dry spell for growth, affords policymakers the ability to gently push back on easing chatter, as they wait for underlying inflation to come down further,” he wrote.

1:49 Economists expect spring interest rate cut after Bank of Canada holds steady

Money markets pared bets for an April rate cut to a 42 per cent chance from a 51 per cent chance before the growth figures, according to Reuters.

CIBC senior economist Andrew Grantham meanwhile said in a note that bond yields – a key metric informing fixed mortgage rates – also pushed higher Wednesday morning amid expectations of a June cut rather than April.

But Grantham said the Q4 bounceback, if it holds, is likely tied more to an easing in previous supply constraints than a surge in consumer demand.

He said he suspects the Bank of Canada will be more concerned with upcoming inflation and labour data than GDP figures in gauging how long to keep its policy rate elevated.

– with files from The Canadian Press, Reuters