Canada gross domestic product showed unexpected signs of stalling at the end of 2022, raising concerns about the impact of high interest rates. The fourth quarter of 2022 saw growth stagnate at zero, with inventories being the biggest drag on the economy since the pandemic. Business investment also declined by 5.5%, the biggest drop since Covid-19 hit.
However, preliminary data from Canada Gross Domestic Product Statistics for January 2023 showed that the economy had expanded by 0.3%, led by oil and gas extraction and wholesale trade. Consumption also rebounded at the end of last year, with household spending rising by 2% annualized in the fourth quarter. Despite this, policymakers are expected to keep the benchmark interest rate at 4.5%, as it remains uncertain whether the growth seen in January will continue or whether it was a one-off weather-related fluke.
The mixed data has left investors confused about the direction of Canada gross domestic product, with some predicting a slowdown in the first three quarters of this year as the lagged effects of higher borrowing costs start to impact demand. Sectors that are more sensitive to higher borrowing costs, such as residential structures, continue to weaken, with investment in the sector falling by 8.8% annualized in the fourth quarter of 2022.
However, some remain optimistic that the economy will pick up in the coming months, with employment surging 10-fold past expectations in January and consumers continuing to spend. Despite this, inflation has decelerated further, leading to concerns about the overall health of the economy.
In light of these mixed signals, the Bank of Canada is expected to hold its benchmark interest rate at 4.5% and pause to assess the impact of its aggressive rate hikes. The data reaffirms the Bank’s intention to hold the rate steady and assess the economy’s response. The Bank of Canada had forecast GDP to grow at a 1.3% annualized pace in the last three months of 2022, but the statistics agency revised the third-quarter expansion down to 2.3% from 2.9%.
The Canadian dollar fell about 0.3% since the data release to C$1.3611 per US dollar, while bonds rallied, pushing yields on benchmark two-year debt down to 4.237%. The latest readings on Canadian GDP will allow the Bank of Canada to defend its pause next week, but the data is not enough to see rate hike bets for later in the year evaporate just yet.
Canada gross domestic product remains in a state of uncertainty, with mixed data causing confusion among investors. While some sectors show signs of growth, others continue to weaken, leaving policymakers to adopt a cautious approach and assess the impact of higher borrowing costs. The Bank of Canada is expected to hold the benchmark interest rate steady and wait for more clarity on the economy’s direction.