Slowly slowing, maybe

A couple of last-minute data points for the Bank of Canada's Governing Council to consider, ahead of its scheduled rate announcement tomorrow (June 1). Statistics Canada reported this morning that real GDP rose 0.7 percent month-on-month in March, marginally below the 0.9 percent recorded in February. For the first quarter as a whole, real GDP grew 0.8 percent (or about 3.1 percent at an annualized rate), slower than in the two preceding quarters and below market expectations. 

Both the March and the Q1 figures point to a reasonably resilient domestic economy, particularly when you recall that COVID restrictions remained in place across much of Canada during the quarter.  StatsCan describes the March increase as "broad-based": fourteen of the twenty sub-sectors it tracks posted gains in the month, with both goods and services sectors growing. As for the Q1 data, the most noteworthy takeaway is that final domestic demand rose 1.2 percent in the quarter, up from 0.9 percent in the final quarter of 2021.  The slowdown in overall growth was the result of a decline in export volumes attributable, somewhat surprisingly, to the energy sector. 

One potential source of concern can be found in StatsCan's preliminary estimate of GDP growth for April. This estimate suggests that real GDP grew by only 0.2 percent in the month, with broad-based slowing in both goods and services output.  This is not altogether surprising in light of the strong monthly growth recorded in both February and March. Before jumping on the recession/stagflation bandwagon, it might be worth keeping in mind that 0.2 percent monthly annualizes to about 2.5 percent, which is higher than the Bank of Canada's estimate of the economy's sustainable growth rate. 

All in all, today's data suggest that the Bank of Canada's primary focus must for now remain on inflation, rather than any risk of a downturn in the economy. Although monetary policy is all but helpless in dealing with supply-side shocks, the Bank has to act in order to keep inflation expectations in check. This points to a 50 basis point increase in the rate target tomorrow -- which markets have already priced in -- with at least one more such increase coming later in Q3.