GDP growth underwhelms, bolstering case for Bank of Canada rate cut in June

Canada’s economic growth picked up at the start of the year, but the results fell short of expectations and follow an extended period of stagnation as the country struggles with higher interest rates.

Real gross domestic product rose at an annualized rate of 1.7 per cent in the first quarter, Statistics Canada said Friday in a report, undershooting analyst expectations of 2.2 per cent and Bank of Canada estimates of 2.8 per cent. Statscan also revised fourth-quarter growth down to 0.1 per cent annualized from 1 per cent.

Friday’s GDP report was the last major economic release before the Bank of Canada’s interest-rate announcement on June 5, a highly anticipated decision.

Investors are leaning toward a rate cut next week, which would mark the start of a policy-easing cycle. To help it curb inflation, the BoC hiked its benchmark interest rate to 5 per cent from emergency lows of 0.25 per cent over a series of decisions in 2022 and 2023.

Now, the Bank of Canada is mulling when to start lowering interest rates without jeopardizing its 2-per-cent inflation objective.

Interest-rate swaps, which capture market expectations of monetary policy, were pricing in a roughly 80-per-cent chance that the central bank trims its policy interest rate by a quarter percentage point, according to Bloomberg data as of Friday morning.

“The Bank of Canada remains on track to cut interest rates in June given the cooling seen in inflation and the fading of momentum in GDP over the quarter,” Katherine Judge, senior economist at CIBC Capital Markets, said in a client note.

Friday’s report showed that first-quarter growth was supported on several fronts. Consumer spending was robust at the start of the year, particularly for services. Business investment swung to an increase, helped by higher spending on machinery and equipment.

The biggest drag on GDP growth came from a slowdown in inventory accumulation by businesses.

The household-savings rate rose to 6.9 per cent from 6.2 per cent in the fourth quarter in seasonally adjusted terms. This was the highest savings rate since the start of 2022.

On a monthly basis, there was a clear fading of economic momentum over the first quarter. January brought a pop of activity, benefiting from the end of public-sector strikes in Quebec and unseasonably warm weather.

By March, however, economic output had flattened. This could prove short-lived as Statscan said in a preliminary estimate that GDP grew 0.3 per cent in April.

“Taking all these pieces together, the economy churned out some moderate underlying growth in the first four months of the year, but has come up well light of the Bank of Canada’s latest estimates,” said Bank of Montreal chief economist Doug Porter in a research note.

The broader trend is that the economy has struggled to generate much growth over the past year, and after accounting for Canada’s soaring population growth, per-capita output has fallen.

Because of the increase in borrowing costs, households and businesses are facing more onerous debt-servicing charges, and many families have cut back on discretionary purchases to get by financially.

The Bank of Canada is intentionally trying to temper demand as part of its inflation-fighting campaign, and those efforts are yielding progress: The annual inflation rate has slowed to 2.7 per cent from peak levels of around 8 per cent two years ago.

The question now is whether the central bank has seen enough progress to begin cutting interest rates.

“There are respectable arguments on both sides of the decision, but we believe the balance of evidence points to a cut – we’ve been calling for a June cut since late last year, and will stand by that call,” Mr. Porter said.