Canada’s economy rises from its slump, but it’s not all good news

The Canadian economy grew 0.6% MoM in January, beating expectations and Statistics Canada’s flash estimate by 0.2 percentage points.

Furthermore, the statistics agency predicted that the economy continued to expand at a pace of 0.4% MoM in February. Together, the data suggests that the Canadian economy has risen from its slump in the second half of last year at a pace faster than the 0.5% QoQ annualised rate predicted by the BoC and that the lagged transmission of the BoC’s hiking cycle may have now flushed through. In combination with falling inflation pressures and still positive employment gains, this could be confused for a increasingly likely soft landing in Canada.

That said, we think the details of today’s report are much less constructive for Canada’s economic fortunes than the headline data insinuate.

Firstly, the positive beat in growth was driven in part by a downwards adjustment to December’s reading. That in itself contributed 0.05pp to the monthly increase. Second, growth in the Canadian economy was highly concentrated in the public sector following the completion of Quebec’s public sector workers’ strikes. Educational services recorded 6% growth as teachers returned to schools, while health care and social assistance also expanded 0.8% as a result of the 420,000 public sector workers returning from strike. Altogether, this contributed 0.4pp to overall growth in the Canadian economy. These two idiosyncratic factors aside, the Canadian economy grew a meagre 0.05% in January from the level assumed this time last month. Such a growth rate would help explain why Canada’s core inflation pressures vanished at the start of 2024 after proving so stubborn over the previous year.

While growth was “broad based”, the majority stemmed from the public sector following the end to strikes in Quebec 

While in this context, the data doesn’t necessarily support the BoC remaining on hold until late-Q2, especially as alternative indicators suggest that per capita consumption remains in recession in Q1, in the eyes of BoC policymakers that are looking to align their easing cycle with that of the Fed, growth will be viewed at face value.

Barring any significant surprise in next week’s jobs data, we suspect the BoC will remain on hold in April, even as their Q1 surveys continue to depict an economic outlook consisting of weak growth and falling inflation. That said, our view on the BoC cutting rates in June and at a pace of 25bps per meeting thereafter for the year remains intact, even as the economy outperforms the BoC’s estimates. Ultimately, this is due to developments in the labour market and inflation, which alongside sentiment indicators pointing towards weak growth and employment conditions, paint a clearer picture of cyclical weakness in the Canadian economy. As a result of today’s data, USDCAD has held underneath the 1.36 handle as odds of an April cut are trimmed slightly, but we continue to think it is a case of when not if this level is broken to the upside.

Stronger GDP print keeps USDCAD from breaking fresh YTD highs, for now

Author: 

Simon Harvey, Head of FX Analysis

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