The national economy continued to grow overall in the first quarter of 2023 as consumers spent more in the face of recession fears, according to Statistics Canada.
Most economists were surprised by the latest show of the economy’s persistent strength, which some say raises the odds the Bank of Canada will have to increase its policy rate again to stamp out inflation.
Canada’s economy grew at an annualized rate of 3.1 per cent in the first quarter, beating Statistics Canada’s early estimates of 2.5 per cent. The Bank of Canada’s latest forecasts had called for 2.3 per cent growth in Q1.
Household spending was up in the quarter following two periods of minimal growth, the agency said Wednesday, but housing investment slowed in the first quarter amid higher borrowing costs.
StatCan said Canadians particularly spent more on new vehicles in Q1. In a note to clients Wednesday, CIBC senior economist Andrew Grantham ascribed that increase to relief in supply chain kinks meaning previous car orders could finally be delivered.
Canadians also returned to dining and vacations in the quarter, Statistics Canada said, with spending picking up for food, alcoholic and non-alcoholic beverages and travel expenditures.
StatCan had also expected the economy contracted by a modest 0.1 per cent in March, but Wednesday’s release shows economic growth was flat for the month.
Flash estimates for April show growth of 0.2 per cent. Grantham said that was a surprise as the public sector strike in that month was expected to be a drag on growth.
Weakness persisted in Canada’s housing market in the first quarter of the year. New construction was down in every province and territory except the Yukon, StatCan said, while renovations and figures tied to resale activity were also down nationally.
The first quarter GDP figures mark a rebound from what StatCan called essentially flat growth in the final quarter of 2022.
Interest rate hike ‘on the table’ in June
The GDP report comes ahead of the Bank of Canada’s next interest rate decision June 7.
The central bank, which is focused on returning inflation to its two per cent target, paused its aggressive rate hiking cycle earlier this year. Some economists, including Scotiabank’s Derek Holt, have called for the Bank of Canada to act quickly to “crush” inflation with another rate hike sooner than later.
However, governor Tiff Macklem has signalled that the Bank of Canada is still evaluating whether interest rates need to go higher to tame inflation which ticked higher in April.
Tuan Nguyen, economist with RSM Canada, said in a note Wednesday that the strong GDP results help to explain why inflation has been so persistent.
Consumer spending fuels the domestic economy and also puts pressure on inflation; higher interest rates raise the cost of borrowing and push consumers to spend more on debt obligations in hopes of cooling that demand and taking some of the steam out of inflation.
Money markets are pricing in a 40 per cent chance of a hike next week as of Wednesday, up from 28 per cent before the data, and they fully expect an increase of 25 basis points by September.
“That means we should expect a live June meeting where all bets are on the table,” Nguyen said of the market odds. He added, however, that RSM Canada favours another rate hold until additional inflation and jobs market data are available for May.
The next Labour Force Survey comes out June 9.
Grantham agreed that while the stronger-than-expected GDP figures raise the odds of an interest rate hike next week, he expects the central bank will continue to wait for more data and revise its inflation and GDP forecasts in July before moving again.
Despite the surprising strength there are still some “cracks” in the foundation of the economy, noted RBC assistant chief economist Nathan Janzen on Wednesday.
He said in a note that job vacancies are declining, consumer delinquency rates are edging higher and household savings are depleting as “headwinds from higher interest rates will continue to build.”
Janzen, too, believes the Bank of Canada’s governing council will be “actively” discussing a rate hike in a week’s time — but ultimately, he believes policymakers will wait until July to see if they need to make a move.
“I personally think next week is too early,” Doug Porter, chief economist at BMO Capital Markets, told Reuters. “But I think (the Bank of Canada) will sound a pretty loud warning bell that they could hike rates again.”
— with files from the Canadian Press, Reuters
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