The Canada GDP experienced a surprise stall in the final quarter of 2022, ending a run of five consecutive quarterly increases. Statistics Canada reported that annualized fourth-quarter gross domestic product (GDP) was flat compared to the previous quarter, far below analysts’ median forecast for a 1.5% increase. This performance also fell short of the Bank of Canada’s Q4 forecast for 1.3% annualized GDP growth. The central bank has been working to slow high inflation by raising its benchmark interest rate at a record pace, but last month announced a pause in its tightening campaign.
Robert Both, Macro Strategist at TD Securities, suggested that the Q4 figures would give the Bank of Canada “just a little bit of comfort that higher interest rates are working to slow demand, especially with the conflicting signals from the labor market over the last couple of months.” The central bank has raised its benchmark interest rate to a record 4.50% to tame inflation, but the economy may have rebounded in January, expanding by 0.3%, according to Statscan. Canada added ten times more jobs than expected in January, with manufacturing activity and retail sales also picking up.
Derek Holt, Vice President of Capital Markets Economics at Scotiabank, noted that “some of the indicators are going in multiple directions, and so the Bank of Canada will remain cautious evaluating the data after this meeting.” The Bank of Canada’s next policy meeting is scheduled for next week, and Holt warned that “no action is a ‘done deal.'” Money markets currently anticipate that the central bank will hold its benchmark rate at 4.50% at the March 8 policy announcement, with reduced expectations that it will be forced to tighten again later this year.
The economy contracted by 0.1% in December compared to November, which was also below analysts’ expectations. Real GDP slowed to 3.5% in 2022 from 5% in 2021, following a 5.1% decline in 2020 during pandemic restrictions. Quarterly GDP was dragged down by slower inventory accumulations and declines in business investment in machinery and equipment, as well as housing. However, Statscan suggested that the economy likely started 2023 on a stronger footing, with increases in sectors including mining, quarrying, and oil and gas extraction, and wholesale trade.
The Bank of Canada previously forecasted economic growth to be close to zero in the first three quarters of this year, and Holt argued that the central bank would want to wait before ruling out the possibility of another rate hike in 2023. “The Bank of Canada will want to see a whole lot more data before they’re convinced that they’re either done and/or that they’re going to act again,” he said. The Canadian dollar was trading 0.2% lower at 1.36 to the greenback, or 73.53 U.S. cents, as investors weighed the mixed economic signals.