Canadian economy regains momentum, thwarts recession calls

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The Canadian economy has picked up momentum in the early stages of 2023 and avoided slipping into a recession, despite the highest interest rates in more than 15 years.

Real gross domestic product rose 0.5 per cent in January from the previous month, Statistics Canada reported on Friday. In a preliminary estimate, the agency said the economy grew by a further 0.3 per cent in February.

On an annualized basis, growth is trending upwards of 2.5 per cent in the first quarter – far stronger than the 0.5-per-cent pace that the Bank of Canada had projected. This also marked a rebound from no growth in the fourth quarter, a result that was largely owing to a sharp pullback in inventory investments.

Friday’s report is something of a double-edged sword.

On one hand, the economy is showing resilience and clinging to a potential soft landing that sees inflation brought under control, but without a significant rise in unemployment.

On the other hand, strong domestic demand could complicate the Bank of Canada’s efforts to bring inflation back to 2 per cent.

“The strength of GDP growth in January, and probably February too, suggests the Bank of Canada will use its April meeting to reiterate that, despite the recent banking turmoil, it is still prepared to raise interest rates again if needed,” Stephen Brown, deputy chief North America economist at Capital Economics, said in a note to clients.

In January, there was broad-based strength in economic activity: 17 of 20 industrial sectors posted gains in GDP.

The hospitality sector enjoyed a 4-per-cent jump in activity that month. The transportation and warehousing industry rose 1.9 per cent, after poor weather conditions in December. Mining, oil and gas extraction expanded by 1.1 per cent, bouncing back from unplanned maintenance in December and other temporary setbacks.

Despite the early show of strength, financial analysts expect the economy to slow over the course of the year. The consensus assumption on Bay Street is that Canada will enter a mild recession later in 2023, as businesses and consumers experience the full effects of rapid interest-rate hikes.

The Bank of Canada has raised lending rates to cool the economy and bring inflation under control. The annual inflation rate has eased to 5.2 per cent in February – the peak was 8.1 per cent in June, 2022 – and the central bank expects a further deceleration to around 3 per cent by the middle of the year.

The Bank of Canada is conditionally holding its policy rate at 4.5 per cent to assess the impact of its policy tightening. However, the bank has said it could resume hiking rates if it sees an “accumulation of evidence” that inflationary pressures aren’t subsiding as expected.

After Friday’s report, analysts said the BoC was likely to hold its benchmark interest rate steady at the next decision on April 12.

“There were many indications that the economy got off to a solid start in 2023, but today’s double-barrelled blast of strength is well above even the most optimistic views,” Bank of Montreal chief economist Doug Porter wrote in a client note. “Suffice it to say that if the strength seen in the opening months of the year persists, the BoC is going to find itself in a tough spot.”