February GDP growth level was significantly below the 0.6% upswing seen in January
With the latest data indicating that Canada’s GDP growth slowed to 0.1% in February, it’s becoming increasingly apparent that the economy’s performance during the earliest parts of the year was a fluke, according to a new analysis by Royal Bank of Canada.
“The surge in GDP in January increasingly looks to have been a head-fake, with activity softening over February and March,” RBC said. “Consumer spending headwinds continue to build as higher interest rates flow gradually through to household borrowing costs with a lag.”
The February GDP growth level was significantly below the 0.6% upswing in January. RBC’s initial estimate for March is a deceleration of 0.1%.
This trend essentially validates the Bank of Canada’s two latest consecutive decisions to keep the benchmark policy rate at 4.5%, RBC said.
“With GDP growth tracking weak momentum into Q2, the BoC isn't expected to hike interest rates again,” RBC noted, while stressing that “inflation is also still too firm to justify a quick shift to cuts, even with the economy showing signs of softening.”
“Softening momentum is consistent with our base-case expectation that GDP will post ‘mild’ GDP declines in Q2 and Q3,” RBC warned.
So far, the Canadian economy is “evolving broadly in line with [our] January projection,” the central bank said recently. “Headline inflation was coming down, and signs of a rebalancing of supply and demand were becoming evident.”
“Governing Council members agreed that while a risk of a sharper slowdown remains, based on their current outlook, cutting rates later this year did not seem to be the most likely scenario,” the BoC added.
