GDP growth slowed in February

Economists say the Statistics Canada data raises the chances interest rate will be cut in June

Canada’s economy grew more slowly than expected in February, and early signs are that growth ground to a halt in March, something economists say could push the Bank of Canada to cut interest rates at its next meeting in June.

Canada’s gross domestic product grew by 0.2 per cent in February compared with the previous month, Statistics Canada revealed Tuesday morning; a consensus of economists surveyed by Bloomberg had expected 0.3 per cent growth.

Preliminary estimates also show the economy didn’t grow at all in March, and Statistics Canada also revised January’s growth down slightly to 0.5 per cent from 0.6 per cent.

Statistics Canada also released a preliminary estimate that Canada’s economy grew by 0.6 per cent in the first quarter, which would translate into an annualized growth rate of roughly 2.5 per cent.

In a research note after the Statistics Canada release, CIBC economist Andrew Grantham said the data is painting a picture of a sluggish economy, which should push the Bank of Canada to start cutting interest rates soon.

“If growth remains sluggish at the start of Q2 as we expect, and inflation doesn’t heat up again in April, the Bank of Canada should start gradually reducing interest rates at the June meeting,” Grantham wrote.

For BMO macroeconomic strategist Benjamin Reitzes, the data is a case of déjà vu.

“The start of 2024 looks eerily similar to 2023, when the economy started the year with a bang, only to stall after Q1,” Reitzes wrote in a research note. “While Q1 looks like it was decent overall, the loss of momentum as the quarter progressed is the bigger takeaway from this report. That puts additional pressure on the BoC to begin cutting as soon as June.”

RBC economist Claire Fan agreed. “Today’s GDP report confirmed our expectations that the January surge in output was temporary, and in no way marked an inflection point for the growth backdrop in Canada that remains very weak,” Fan wrote. “That together with an increasingly soft labour market … and substantially slower inflation pressures are consistent with the Bank of Canada to start easing the monetary tap on the economy soon.”

Matthieu Arsenault, an economist at National Bank, argued that the true picture is even gloomier, because Canada’s rapidly rising population should have led to faster GDP growth. Instead, GDP per capita has now dropped by a full three per cent since its peak in September 2022, Arsenault said.

“A decline of this magnitude has never been recorded outside of a recession,” said Arsenault.

Without interest rate cuts soon, the Bank of Canada risks damaging the economy even further, Arsenault said.

In its April Monetary Policy Report, the bank predicted that the Canadian economy would grow at an annualized rate of roughly 2.8 per cent in the first quarter, and two per cent in the first half of this year

The central bank raised interest rates 10 times between March 2022 and last summer, as it attempts to bring inflation down to its two per cent target.

The theory is that by making it more expensive to borrow money, consumers and businesses will spend less, driving down prices and slowing the economy.