Canada GDP Grows Stronger-Than-Expected 0.6% in January — 2nd Update

By Robb M. Stewart

OTTAWA--Canada's economy made a solid start to the new year with growth in the first two months tracking well ahead of the Bank of Canada's forecast, reinforcing expectations the central bank will once again stick to the sidelines at its coming policy meeting.

The expansion in January was the strongest in a year, bolstered by a recovery with public sector strikes ending in Quebec and backed by increased activity across many segments of the economy. And a flash estimate suggests the strength carried through to last month thanks to increases in areas ranging from natural resources extraction to manufacturing and finance, Statistics Canada said Thursday.

Although inflation in the country has cooled in recent months and slack is building in the labor market, the rebound in industry growth in 2024 suggests no urgency for the Bank of Canada to begin cutting interest rates and economists continue to expect it to leave its policy rate unchanged at next month's meeting and possibly through the first half of the year.

Gross domestic product, a broad measure of goods and services produced across the economy, rose 0.6% in January GDP from the month before to 2.218 trillion Canadian dollars, the equivalent of $1.635 trillion, Statistics Canada said Thursday. That was stronger than both the consensus forecast of economists and the data agency's advance estimate, both for 0.4% growth. Compared with a year earlier, GDP by industry in the first month of the year rose 0.9%.

Preliminary data suggest GDP by industry expanded 0.4% month-over-month in February.

"The economy started 2024 with a bang. Broad-based gains suggest that the economy is faring better than expected despite restrictive monetary policy," said Arlene Kish, director of Canadian economics at S&P Global Market Intelligence, who only expects the first rate cut in Canada in July.

Canada's economy effectively stalled in the middle of last year as consumer demand and business investment faded under the weight of the central bank's aggressive interest-rate-raising campaign.

The Bank of Canada, which is due to update its economic projections when it next decides on rate on April 10, had forecast modest growth of just 0.5% annualized in the first quarter of this year following a slight recovery in the final three months of 2023. Economists estimate that--provided the advance estimate for February holds--growth is tracking at more than 2% for the quarter and could even advance as much as 3.5%.

Economic activity in January was driven by services-producing industries with a rebound in education following the end of public sector strikes in Quebec that had contributed to downwardly-revised 0.1% dip in GDP in December.

Canadian manufacturers also saw a recovery in January, as did utilities with a sudden drop in temperatures mid-month that drove a surge in demand in western parts of Canada. While the Quebec strikes in November and December, which also covered some health care workers in the province ended, Statistics Canada said the start of a strike by some teachers in the province of Saskatchewan tempered some of the education sector's rebound.

Overall, services-producing industries increased 0.7% on-month and goods-producing industries were up 0.2% in as manufacturing recouped all of the decline seen in December and utilities rebounded with a sudden drop in temperatures mid-month that drove a surge in demand in western parts of Canada. Still, rail transportation was down for a second consecutive month, dented by the winter weather in Western Canada that affected train operators, and oil and gas extraction pulled back after reaching a record high level in December while and mining and quarrying declined after three straight months of growth.

Statistics Canada's early indications for February suggest activity by utilities faded but only partially offset growth in other areas. The estimate is due to be updated with the release of official GDP data for the month on April 30.

Although economists widely expect the Bank of Canada to leave its benchmark rate at a more than two-decade high of 5% for a sixth straight policy meeting on April 10, many had anticipated policymakers could signal the ground was being laid for cuts later in the year. The central bank is looking for signs that closely watched measures of core inflation are sustainably headed lower and remain wary of elevated wage inflation and recent signs the housing market is picking up.

In a another release Thursday, payroll data showed little change in job vacancies in January and a 3.9% rise in average weekly earnings from a year earlier.

Strategists at TD Securities suggested the latest GDP figures will raise the bar for any dovish pivot by the Bank of Canada at its next meeting, and means it will want to see more indicators for February and March before shifting its stance. In a research report, they said the renewed momentum in the economy into 2024 will make it tougher for central bank officials to embrace the recent deceleration in the consumer price index, which unexpectedly cooled to 2.8% in February, nearing the Bank of Canada's 2% target.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

March 28, 2024 11:12 ET (15:12 GMT)

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