The Canadian economy lost momentum after a strong start to the year, strengthening economists’ view that the Bank of Canada (BoC) is likely to begin cutting interest rates in the coming months. Statistics Canada reported on April 30 that real gross domestic product (GDP) rose 0.2% in February, following a 0.5% increase in January.
What is GDP?
Gross domestic product (GDP) measures the total value of goods and services produced within a country over a specified period, typically a quarter or a year. Economists calculate it using production, income, or expenditure approaches to capture the overall size and direction of economic activity.
Read the full definition in the MoneySense Glossary: What is GDP?
RBC economist Claire Fan described the January jump in output as temporary and said the February slowdown shows no clear inflection point for Canada’s growth, which she characterized as “very weak” in a client note. Statistics Canada’s advance estimate for March indicated that real GDP was essentially unchanged for the month, reinforcing the view that momentum faded as the quarter progressed.
Is monetary policy in Canada working?
On a preliminary basis, the Canadian economy grew at an annualized rate of 2.5% in the first quarter of 2024. While that indicates growth overall, the recent pattern of a sharp January gain followed by much softer activity in February suggests economic expansion remains tepid. Higher interest rates are continuing to weigh on consumer and business spending decisions, and the latest GDP figures give the Bank of Canada additional evidence to assess whether tighter monetary policy is feeding through to lower inflation.
BoC Governor Tiff Macklem has said the central bank is already seeing conditions that could allow it to cut its policy rate from 5%, but he has emphasized the need for those conditions to be sustained before moving. BMO strategist Benjamin Reitzes noted that the loss of momentum through the quarter strengthens the case for rate cuts sooner rather than later and said it increases the likelihood that the Bank of Canada could begin easing policy as early as June — provided upcoming data continue to support that view.
When will interest rate cuts begin?
The sluggish pace of growth is evident beyond GDP, with signs of weakness in the labour market. Job creation has not kept pace with population growth, and the unemployment rate rose to 6.1% in March. Reitzes cautioned that a June rate cut would still depend on the April inflation reading, which was expected in the weeks after the GDP release. Policymakers will be watching inflation, hiring trends and output growth for confirmation that tighter policy has had the desired cooling effect on demand and prices.
How is Canada’s economy?
Inflation remained above the BoC’s 2% target, with the annual rate at 2.9% in March, a modest uptick from the previous month. The February GDP report showed that 12 of 20 industry sectors posted growth, while the remainder were flat or contracted, reflecting a mixed economic picture.
Services-producing industries grew 0.2% in February, helped by a 1.4% increase in transportation and warehousing. Rail transportation rebounded strongly, rising 5.5% as activity normalized after unusually cold January temperatures in Western Canada. Air transportation also expanded by 4.8% as international travel picked up.
Goods-producing industries were essentially unchanged for the month. The mining, quarrying and oil and gas extraction sector increased 2.5% in February, with oil and gas extraction up 3.3%, partially offsetting a contraction the month before. Mining and quarrying (excluding oil and gas) rose 1.9%. By contrast, utilities contracted 2.6% and manufacturing declined 0.4% in February, reflecting uneven performance across key components of the production side of the economy.
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Read more about the economy:
- Making sense of the markets this week
- The best mortgage rates in Canada
- What is Canada’s inflation rate?
In summary, the early-year surge in output has given way to slower monthly growth, leaving policymakers cautious. The coming weeks’ inflation figures and labour market reports will be key to determining the timing and scale of any Bank of Canada rate cuts. For households and businesses, the main takeaway is that while growth continues, it appears fragile, and interest-rate expectations are increasingly tied to whether the disinflation trend becomes clearer and more persistent.