Economic recovery in late 2023 could delay rate cuts, economists say

Nojoud Al Mallees, Canadian Press

Published Wednesday, January 31, 2024 3:20 pm EST

OTTAWA – Canada’s economy appears to have ended 2023 on a stronger-than-expected note, which economists say could push back the timeline for interest rate cuts this year.

Statistics Canada reported Wednesday that the economy grew 0.2 per cent in November, marking the first expansion in six months.

A preliminary estimate suggests that real gross domestic product rose 1.2 percent on an annualized basis in the fourth quarter, following a decline of similar magnitude in the third quarter.

That would bring economic growth in 2023 to 1.5 percent, StatCan said.

Those figures exceed the Bank of Canada’s forecasts. The central bank projected 0.7 percent growth in the fourth quarter and one percent growth by 2023.

The Canadian economy has slowed over the past year as higher borrowing costs weigh on consumer spending and business investment. But it has so far avoided a recession.

Bank of Montreal chief economist Douglas Porter says Wednesday’s better-than-expected report suggests economic forecasts for 2024 may need to be revised upward.

A stronger economic outlook this year would mean the Bank of Canada can take its time before cutting interest rates.

“This strong result, after a long dry spell for growth, gives policymakers the ability to gently rein in talk of easing, while waiting for core inflation to fall further,” Porter wrote in a note to a client.

However, economists are interpreting Wednesday’s report with some caution and continue to expect the economy to show weakness in the coming months.

While Statistics Canada offers an idea of ​​what to expect in its preliminary estimates, the final results can often differ greatly.

RBC economist Claire Fan says that’s one reason the report should be taken with “a grain of salt.”

Furthermore, he said that November’s real GDP increase was driven by exceptional factors such as the recovery from factory closures in the manufacturing sector.

“It really shouldn’t be interpreted as some sort of shift in, say, aggregate demand and consumer activity toward the end of 2023,” he said.

StatCan said growth in November was driven by gains in goods-producing industries, including manufacturing and wholesale trade.

Meanwhile, the educational services sector contracted in the month as strikes began in Quebec.

The Bank of Canada, as well as private sector economists, expect economic growth to remain weak in the first half of 2024 before recovering in the second half of the year.

Weaker growth – along with lower inflation – should pave the way for interest rate cuts. Financial markets believe the first rate cut could come as early as April.

Fan says RBC still anticipates the central bank will begin lowering its key rate in June.

“Higher rates have been putting a lot of downward pressure on consumer spending activities. This remains the case and will continue to be so as rates remain high through the first half of this year,” he stated.

In the latest interest rate decision, Gov. Tiff Macklem indicated that talks in the governing council have veered toward the timing of rate cuts.

The central bank’s key interest rate currently stands at five percent, the highest since 2001.

This report by The Canadian Press was first published Jan. 31, 2024.

Leave a Comment