The Canadian economy had a surprisingly strong start in the opening months of the first quarter of 2023.
January saw a much stronger-than-expected increase in real monthly gross domestic product, which was up 0.6% during the month. However this was largely due to a number of distortions including one-off government support measures that helped to boost the economy’s overall performance.
As these support measures rolled off, Statistics Canada reported last week that growth did indeed slow in February with GDP increasing by just 0.1% month over month, which was slightly below market expectations. Preliminary estimates by Statistics Canada suggest a slight decline in growth of 0.1% in March.
All told, these monthly GDP numbers suggest that Canada’s economy did surprisingly well during the opening quarter of 2023. For example, the quarter-to-quarter annualized rate of growth in the first quarter is tracking at around 2%, which is broadly in line with the Bank of Canada’s most recent estimates. The surprising strength of GDP growth also corroborates the Bank of Canada's guidance that monetary policy needs to be “restrictive” in order to cool an overheating economy.
That said, GDP statistics are largely rear-view reflections of the economy. Looking at preliminary March data, the handoff to GDP growth in the second quarter is quite weak and suggests that growth during the entire quarter will likely be negative. Given leading indicators of growth, we expect growth to remain weak and well below the economy’s potential over the rest of the year, with the risk of a moderate recession likely.
The deteriorating picture for economic growth, alongside quickly receding inflation risks, is a key reason why the Bank of Canada has opted to hold interest rates steady since March. But it may also be a key reason why the Bank of Canada may need to make monetary policy less restrictive by the end of the year.