Recent data from Statistics Canada reveals that Canada’s gross domestic product (GDP) experienced unexpected growth in both November and December 2023. While this positive economic development is generally welcomed, it may have repercussions for potential interest rate cuts. Economists at BMO point out that if the preliminary estimate holds true, the country’s economy could have expanded at an annualized rate of over 2% during the final quarter of 2023. This notable upturn in economic activity, driven by the goods-producing sectors such as manufacturing and resources, which were influenced by robust economic data from the United States, may lead to heightened expectations for economic performance in 2024. Consequently, it could relieve some of the pressure on the Bank of Canada to initiate interest rate reductions in the immediate future. This would enable policymakers to adopt a more measured approach while monitoring underlying inflation trends.
Canadian GDP growth has surpassed expectations, with real GDP advancing by 0.2% in November and an estimated 0.3% growth in December. While experts remain cautiously optimistic, they are wary of placing too much confidence in the preliminary estimates, as they have been known to differ significantly from the official confirmations.
Douglas Porter, Chief Economist at BMO, highlights the significance of this unexpected growth, especially when compared to the stagnation witnessed during the middle six months of 2023. The source of strength in the economy has primarily been the goods-producing sectors, notably manufacturing and resources. This growth is believed to be a spillover effect from the United States, which has consistently reported robust economic data.
The positive growth experienced in late 2023 is expected to drive expectations for the final quarter of the year much higher than previously anticipated. BMO’s estimates suggest that Q4 2023 will see growth of 0.3%, equivalent to an annualized rate of approximately 1.2%. In contrast, the Bank of Canada’s (BoC) recent forecast predicted flat (0%) growth for the same period, drawing criticism for its perceived optimism.
Porter emphasizes that the unexpected momentum observed at the end of 2023 presents upside risk for the Canadian economy. However, it is important to note that even with this growth, it remains modest compared to the backdrop of a 3% annual population increase.
The stronger-than-expected growth in 2023 may have implications for those hoping for interest rate cuts. With the economy performing better than previously anticipated, BMO anticipates that 2024 forecasts will be adjusted upward. Consequently, there will be reduced pressure on the Bank of Canada to implement interest rate cuts in the near term. Policymakers may opt for a more cautious approach, closely monitoring underlying inflation trends as they navigate the evolving economic landscape.