Canada’s real gross domestic product (GDP) displayed robust growth in November, with early estimates suggesting even stronger performance in December. This economic resilience could alleviate pressure on the Bank of Canada to implement interest rate cuts.
The November GDP growth of 0.2% exceeded expectations, marking the first monthly increase since May and surpassing an advance reading of 0.1%. The expansion was primarily driven by goods-producing industries, including manufacturing and wholesale trade, which reported their most substantial gains since January 2023.
Bank of Montreal chief economist Douglas Porter noted that these sectors are heavily influenced by exports, indicating that the strength of the U.S. economy is having a positive spillover effect on certain Canadian sectors.
Both non-durable and durable goods manufacturing played a significant role in the monthly GDP growth, while wholesale trade rebounded by 0.7% following two months of declines.
A preliminary estimate of 0.3% growth in December suggests that GDP may have expanded by 0.3% in the fourth quarter, potentially resulting in a 1.5% economic growth rate for 2023, according to the statistics agency.
BMO’s Porter suggested that if December’s estimate is accurate, the momentum going into 2024 could exceed expectations, potentially reducing the urgency for the Bank of Canada to implement interest rate cuts.
This strong economic performance allows policymakers to delay any rate cuts while they monitor underlying inflation trends. However, RBC economist Claire Fan cautioned that the re-acceleration of growth should be viewed cautiously, as early GDP estimates have been subject to revisions, and certain factors contributing to November’s strength may not be sustainable.
Despite ongoing speculation about rate cuts, the heating up of the Canadian economy may push expectations for the first rate cut further down the line. The Bank of Canada will closely monitor strong data releases like November’s GDP growth as it navigates its monetary policy decisions in the coming months.