Some slowdown!

Three days on from Finance Minister Chrystia Freeland's poorly-received budget, new data from Statistics Canada cast serious doubt on the Government's logic in ballooning the Federal deficit. Canada's real GDP grew 0.5 percent in January, exceeding market expectations and more than reversing the marginal decline of 0.1 percent posted in December. Moreover, the early estimate for February shows a further 0.3 percent gain.  Even with December providing a weak :"handoff", it looks as though annualized real GDP growth for Q1 will be between 2.5 and 3.0 percent. 

Details of the report indicate widespread strength, with the sectors that contributed to December's weak result all rebounding smartly. Goods output rose 0.4 percent in the month, while services output rose 0.6 percent. Overall, 17 of the 20 sub-sectors tracked by StatsCan posted higher output in the month. The expected gains for February also appear to be reasonably broad-based. 

Much of the early reaction from the Bay Street economic community has focused on what these numbers mean for the Bank of Canada. If the economy is still not fully responding to the aggressive rate hikes of the past year, will the Bank have to call a halt to its "conditional" pause in tightening?  In the near term almost certainly not: the much-discussed base effect will keep year-on-year CPI on a downward track through mid-year, so the Bank can safely stay on the sidelines in the next month or two. Beyond that, the key to the Bank's actions will depend on the month-on-month gains in CPI, not the backward-looking year-on-year numbers. If the month-on-month numbers come in too high for the Bank's liking, a return to tightening after mid-year cannot be entirely ruled out.

More interesting than the monetary policy implications, however, is what the GDP data tells us about the recent budget.  Ms Freeland claimed that half of the C$ 10 billion increase in the projected deficit for FY 2022/23 (now just about over) was a result of lower-than-expected revenues,  as a result of the faltering economy.  Given what we already knew about the persistent strength in the jobs market, that seemed dubious even when she said it. Now that we know the economy entered the final quarter of the fiscal year on a strong note, it seems simply wrong.

Unless the economy crashed off a cliff in March, Federal revenues for the fiscal year will likely prove to be significantly higher than the budget forecast. That would be good news if it meant that the final deficit figure might turn out to be lower than the widely-criticized C$ 43 billion tabled on Tuesday -- unless, of course, Ms Freeland chooses to spend what she is likely to see as a nice little windfall.