Canada: Q1 number now seems much stronger than expected

Canadian GDP rose at a 1.1% rate in February, above the 0.8% expected, according to a report released on Friday. Analysts at CIBC, point out that the Bank of Canada now has even more ammunition to justify a non-standard 50 bp interest rate hike at the next meeting, and likely the one thereafter.

Key Quotes:

“After hitting the fast lane in February, advance data suggests growth eased to a steadier pace in March. The 1.1% gain in February was even larger than the consensus and advance estimate (+0.8%), and was followed by a steadier, but still solid, 0.5% gain in March. This puts Q1 as a whole on track for a 5.6% annualized growth rate, well above the 3% forecast contained within the Bank of Canada's latest MPR.”

“The Canadian economy continues to surprise and the Q1 number now seems much stronger than expected. This would put our annual forecast at around 4%, all else equal, a few ticks higher than our last projection. However, we’ve seen on occasion big gaps between these monthly data on GDP by industry data and the subsequent quarterly GDP figures, which are measured by the sources of expenditures, most notably in Q2 2021. We continue to expect a deceleration in growth over the balance of the year as impact of high inflation and rate hikes put a squeeze on Canadians' spending power and slow the housing market.”

“With another strong release in hand, the Bank has even more ammunition to justify a non-standard 50 bp interest rate hike at the next meeting, and likely the one thereafter. However, with growth likely to slow in the second half of the year and inflation poised to decelerate, we still think that the path higher for interest rates won’t be as steep as financial markets are currently expecting, and we still see a peak of 2.5% reached in early 2023.”

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