Canada’s economy grew by 3.1%
Strong consumer spending helped push GDP higher in the first quarter
Canada’s economy grew at an annualized rate of 3.1 per cent in the first quarter, according to Statistics Canada, raising the odds of a Bank of Canada interest rate hike.
A consensus of economists had expected the economy — as measured by gross domestic product — to grow at an annualized rate of 2.5 per cent in the first quarter. Even the bank’s latest forecast had the economy growing at an annual rate of 2.3 per cent in the first quarter.
But strong growth in consumer spending helped push the number higher, Statistics Canada said.
The continued economic strength could tempt the bank to increase rates as soon as its meeting next week as it attempts to drive inflation down.
“It’s definitely stronger than expected. It turns up the temperature for the bank,” said BMO chief economist Douglas Porter.
Before the GDP announcement, trading on the overnight interest “swap” market had priced in a 30 per cent likelihood of a quarter percentage point interest rate hike next week, and a 50 per cent likelihood of an increase at the bank’s July meeting. After the announcement, the odds rose as high as 40 and 60 per cent, respectively, Porter noted.
Stronger than expected GDP, combined with several straight months of higher than expected job growth — and a rise in inflation in April — make another interest rate hike more likely, Porter said.
“It’s the uniformity of how the data is coming in on the stronger side of the ledger,” he said.
Still, while the bank could easily be tempted to start raising rates again, there are signs consumer spending — and the economy — are slowing down, argued Pedro Antunes, chief economist at the Conference Board of Canada.
Much of the first quarter consumer spending, Antunes said, came in January, along with HST rebates or other government measures meant to help households deal with inflation. That money, he said, is now gone.
“Retail sales activity, the last couple of months, it’s eased.”
There’s also another big hit still to come for the economy, Antunes added: Only 30 per cent of Canadian mortgages have been renewed since the Bank of Canada started raising interest rates last March. That means 70 per cent of mortgage holders haven’t felt the impact of rate hikes.
“I still think we need to see the full impact of the rate hikes we’ve already had on the debt burden Canadian households have, which is very high,” Antunes said. He also pointed to a drastic decline in savings rates as another sign Canadians have less financial wiggle room. In the fourth quarter of 2022, Canadians saved 5.8 per cent of their gross income. In the first quarter of this year, they saved less than half that, 2.8 per cent.
Still, the strong GDP number, job growth and inflation could make it tougher for the bank to resist raising rates, Antunes acknowledged. It’s something he didn’t expect to see this soon when the bank announced a pause in its rate-raising campaign in January.
“I was thinking that once they announced the hold, that they would really hesitate to raise rates again,” said Antunes. “But it’s clear from the notes of their discussions, that it’s been a consideration. And the economy’s been stronger than they expected.”
Andrew Grantham, a senior economist with CIBC, agreed that the GDP number makes it more likely the Bank of Canada will raise rates eventually, but expects a move would come in July rather than next week.
“The resilience of GDP raises the possibility of a further interest rate hike from the Bank of Canada,” Grantham wrote in a research note. “However, we still expect that they will want to wait and see more data … rather than pull the trigger … as early as next week.”
In April, Canada’s annual rate of inflation rose for the first time since last June, hitting 4.4 per cent. While that was substantially lower than last June’s peak of 8.1 per cent, it’s still higher than the central bank’s two per cent target.
Last March, the bank began an aggressive rate-hike campaign in a bid to drive inflation down, pushing its key overnight rate to 4.5 per cent from 0.25 per cent. The theory is that by making it more expensive to borrow money, consumers and businesses will spend less, which will drive prices down.
In January, a hike of 25 basis points (a quarter of a percentage point) came with a statement from bank governor Tiff Macklem that it was pausing hikes — at least temporarily.
(The economy is) definitely stronger than expected. It turns up the temperature for the bank. DOUGLAS PORTER BMO CHIEF ECONOMIST