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The economy is better than expected, but not enough to force the Bank of Canada’s hand


The Canadian economy rebounded in January in an unexpected show of strength, with real GDP posting a 0.5% gain. While mild weather contributed to this surprise, the bigger surprise is the flash estimate for February posting a gain of 0.3%. This is being driven by mining/oil/gas, manufacturing and finance. The Bank of Canada has estimated an annualized first quarter gain of 0.5%. It looks like Q1 could grow by 2.5%.

We expect that in the next two quarters we should see the economy cool off. This is supported by the Bank’s Business Outlook Survey, which fell 1.16 points to -1.10. This is the first time that the indicator has been in negative territory since 2020. For the first time in several quarters, wage pressures were not mentioned.

Employment data for March posted a gain of 35,000, which was stronger than the consensus forecast of +7,500. Only three sectors – transportation, business services and finance – registered strong hiring. These gains need to be seen in the context of rapid growth in our population and labour force.  The 15+ age group in the population increased more than 80,000 in March following increases of 60,000 in the previous two months. The unemployment rate remained unchanged at 5% as the participation rate fell. Wage growth, despite slightly decelerating from the prior month, is still too high for the Bank of Canada at 5.2% year-over-year.

While this data is stronger than the Bank of Canada anticipated, we expected the Bank will remain on the sidelines at the April policy meeting.

Independent Opinion

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