Canada's GDP grew less than expected. Will a rate cut follow?

Spending by Canadian households helped the economy grow at an annualized rate of 1.7 per cent in the first three months of the year, Statistics Canada said Friday.

Economists say that expansion was less than expected, as estimates had called for a better than two per cent increase, but weaker growth than forecast increases the odds of an interest rate cut by the Bank of Canada next month.

Household spending on services rose 1.1 per cent, boosted by spending on telecommunications services, rent and air travel, while household spending on goods gained 0.3 per cent, helped higher by spending on new trucks, vans and sport utility vehicles.

The results for the first quarter came as Statistics Canada said real gross domestic product was essentially unchanged in March, following growth of 0.2 per cent in February.

Douglas Porter, chief economist at the Bank Of Montreal, said in a note the country's economy "cooled notably in the early spring after a decent start to the year," referring to January's performance, which surpassed predictions and was a 12-month high.

Katherine Judge, director and senior economist of CIBC Capital Markets, said in a note that while the economy improved, "we're not yet basking in the sun," citing concern that March showed essentially no economic growth, after a boost in spending at the start of the year.

Friday's reading of the economy comes ahead of the Bank of Canada's interest rate decision set for next week.

Rate cut hangs in balance

Bank of Canada governor Tiff Macklem has said a rate cut is within the realm of possibilities, but that the decision will be driven by the economic data.

He has said the central bank is seeing the right conditions to begin lowering its policy rate from five per cent, but that he wants to see those conditions sustained to ensure inflation is heading down to the bank's two per cent target.

The annual inflation rate fell to 2.7 per cent in April compared with 2.9 per cent in March.

The March GDP figure came as the construction industry gained 1.1 per cent for the month, its strongest growth rate since January 2022. Meanwhile, the manufacturing sector fell 0.8 per cent, weighed down by retooling work at multiple automotive assembly plants in Ontario.

The agency said its preliminary estimate for the economy in April points to growth of 0.3 per cent as increases in manufacturing, mining, quarrying, and oil and gas extraction and wholesale trade were partially offset by decreases in utilities.

Statistics Canada also revised its reading for growth in the fourth quarter of 2023 down to an annualized rate of 0.1 per cent, compared with its initial report of an annualized rate of one per cent.

Parsing the numbers, Judge at CIBC said that "the Bank of Canada remains on track to deliver the first interest rate cut at next week's meeting." 

Porter said the data modestly increases the chances of a rate cut next week, and while there are "respectable arguments" on both sides of the decision, "we've been calling for a June cut since late last year, and will stand by that call."

For its part, RBC said in a note that it sees little reason for the Bank of Canada to wait on easing rates and is looking for a 25 basis point cut to the overnight rate next week. 

On the other hand, TD Bank senior economist James Orlando noted that the central bank has prided itself on communicating its intentions to make changes to monetary policy ahead of an actual move.

 "If it wants to keep up this effort of transparency and forward guidance, we expect the BoC will hold rates steady next week and use the meeting to tee-up a rate cut in July," Orlando wrote in a report.

 "That said, expect fireworks as the BoC could go either way with this one."