News & Analysis

Canada’s economy grew at a steady pace of 0.2% MoM in January, confirming both StatsCan’s advance estimate from December’s report and the analyst consensus, while preliminary estimates for February point to 0.8% MoM growth as provincial health measures were eased.

The accuracy of the advance estimate for January was a welcome surprise given that the Omicron-related health restrictions led to major job losses in high-contact services industries that month. It also bodes well for February’s GDP print, which currently predicts strong growth at 0.8% MoM. Adding further to today’s positive growth message, December GDP was revised up from a flat to positive 0.1% MoM reading.

The Bank of Canada projected in its January Monetary Policy Report that real GDP would grow at a 2% quarter-on-quarter annualized rate.

With the January and February figures alone, Canada’s economy has already grown at double that pace this quarter.

Strong predicted output growth for Q1 gives the Bank of Canada cover to focus on reining in inflation, and increases the odds that it could deliver a larger-than-normal 50 basis point interest rate hike at its next meeting in April. The results of next week’s Q1 outlook surveys are the biggest potential catalyst that could derail the BoC from its current course for a larger than usual rate hike.

On an industry basis, goods-producing industries did the heavy lifting, posting a 0.8% gain in January, while aggregate services output neither rose nor fell. More specifically, construction (+2.8%), wholesale trade (+3.1%), and retail trade (+2.5%) delivered the largest positive contributions to January growth, while accommodation and food services (-11.5%) and transportation and warehousing (-3.0%) were the biggest drags.

Despite the strong growth data out of Canada that confirms the likelihood that the BoC will take a larger step in April, the loonie largely focused on broader market developments.

A downturn in market risk sentiment, as evidenced by the decline in US equity indices, continues to be the dominant driver for the loonie, while oil prices also sit lower on the day amid speculation that the US will release 180m barrels of oil from its Strategic Petroleum Reserves. In this environment, and with risk that medium-term inflation expectations don’t tick up in Q1’s outlook surveys next week, the loonie is likely to continue trading in line with the broad dollar move.

Omicron-related job losses weren’t enough to make the economy contract in January


Jay Zhao-Murray, FX Market Analyst
Simon Harvey, Head of FX Analysis


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