A reawakening of Canada’s stagnant economy at the end of 2023 may have kept a technical recession at bay, but it could delay a highly anticipated cut to interest rates, experts say.
A technical recession, which is defined as two consecutive quarters of negative gross domestic product (GDP) growth, was expected to hit the country last year after the Bank of Canada raised interest rates in an attempt to bring inflation under control.
Canada’s economy has been struggling to grow in the face of both high inflation and elevated interest rates as Canadians cut spending to focus on paying higher housing and food costs. The resulting decrease in spending caused businesses’ sales to decrease sharply in 2023, but it appears GDP made a slight comeback by year’s end, according to a recent Statistics Canada report.
StatCan said real GDP rose 0.2 percent in November over the previous three months, thanks in large part to growth in the country’s goods-producing sectors including manufacturing and wholesale trade, which recorded their biggest gains since the beginning of last year. The agency had originally forecast an increase of 0.1 percent.
A preliminary estimate suggests real gross domestic product increased 0.3 percent in the fourth quarter and by 1.5 percent in 2023 as a whole, StatCan said.
“Notably, most of the growth in November (and apparently in December too) came from the goods-producing sectors, and particularly manufacturing and resources,” Bank of Montreal chief economist Douglas Porter said in a note. “Since these sectors are heavily influenced by exports, it seems that the surprising resiliency in the U.S. economy is indeed spilling over into some sectors in Canada.”
Mr. Porter said Canada’s surprising growth to end 2023 means the central bank is unlikely to cut interest rates any time soon.
“There’s also less pressure on the BoC to start cutting any time soon,“ he said. ”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.”
Royal Bank of Canada economist Claire Fan said the “re-acceleration of growth” should be taken “with a grain of salt,” noting that early GDP estimates have been highly revision-prone and “a lot of the strength in November was due to one-off factors.” These include recoveries from earlier factory shutdowns, such as those in the chemical and metal sub-sectors, and strike activities.
The December estimate shows growth in the fourth quarter of 2023 is “tracking an annualized increase of 1.2 percent,” which is above RBC analysts’ tracking for a small decline, Ms. Fan said in a note.
“Overall we continue to expect pressures from elevated interest rates to curb consumer demand, stalling growth in both output and inflation over the first half of 2024 before the BoC is expected to cut rates in June,” she said.
TD economist Marc Ercolao said markets continue to be focused on the timing of rate cuts, but a “heating up” of the country’s economy could push expectations for a first cut “further down the line.”
While the Bank of Canada “remains in a holding pattern as it awaits confirmation that inflation will decisively settle” at their 2 percent inflation target, he wrote, “strong data prints” such as November’s GDP release “will be keeping the Bank on their toes.”
