Surprising economic strength won’t change Bank of Canada’s thinking

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Canada's better-than-expected economic growth in January will surely be welcomed at the Bank of Canada. But while it might alleviate their sleepless nights, it's not enough to change their thinking.

Gross domestic product grew 0.2 per cent in January, modestly ahead of the 0.1-per-cent pace economists had expected. That sets up the economy with some encouraging momentum in the first quarter – which certainly was far from certain when the quarter began, coming off December's dismal 0.2-per-cent decline and the anemic 0.6-per-cent annualized growth in the fourth quarter. The initial response to the data from Bay Street economists was that Canada now looks on track for about 2-per-cent annualized growth in the first quarter.

Coupled with Wednesday's higher-than-expected consumer price index inflation number for February, the data take some of the pressure off the central bankers, who had been looking at slowing growth and inflation and were feeling the pressure to consider cutting interest rates from their already very low levels. That is a decision Bank of Canada boss Mark Carney is loathe to make – rate cuts would hardly jibe with the goal of taming consumer debt loads, something Mr. Carney would dearly love to have well in hand before he exits his post this summer. Seeing inflation and GDP rebound to healthier levels will certainly remove rate cuts from the picture.

But by the same token, these latest numbers still tell us that rate increases are still a distant dream. The Bank of Canada has hinted that a rate hike is unlikely before the second half of 2014, and that's based on a pace of economic growth that, even with January's encouraging number, still hasn't materialized. Even the current quarter would need more acceleration to reach the central bank's most recent forecast of a 2.3-per-cent annualized pace. And inflation, at 1.2 per cent over the past 12 months, is a long way from the 2-per-cent midpoint in the Bank of Canada's target band; it would need to be headed north of 2 per cent for a sustained period before the bank starts talking rate hikes.

Royal Bank of Canada assistant chief economist Paul Ferley argued in a research note that GDP growth "is still not at a pace that would put sustained downward pressure on the unemployment rate" – something that's critical for the Bank of Canada, as a tightening labour market is a key element for closing the capacity gap and fuelling inflationary pressures, both of which would be needed to convince it to raise rates. Some data released Wednesday, which flew under most radars, suggest the jobs market may have even more slack than many observers believed.

Statistics Canada's survey of employment, payroll and hours (which, unlike the monthly labour force survey, canvasses businesses rather than households) indicates that non-farm employment hasn't grown at all since September – and has declined in three of those five months. Contrast that with the monthly labour force survey, which shows net gains of nearly 130,000 jobs since September. The business survey suggests Canada's employment landscape – a key driver of domestic consumer demand – may be considerably weaker than the labour force survey has been indicating.

Combine that with the tepid wage growth in the same survey (National Bank Financial senior economist Krishen Rangasamy pegged the annualized wage-growth pace at about 1 per cent for the first quarter, "miles below" the 4.8-per-cent pace as recently as the 2012 third quarter), and it's hard to see the jobs market being a strong engine for growth or inflation in the next few months.