Accelerating into a recession?

I'm almost embarrassed to be criticizing media coverage of the Canadian economy again, but the denizens of the newsrooms leave me very little choice. This morning Statistics Canada reported that real GDP grew 0.2 percent in February, compared to a downward-revised increase of 0.5 percent in January. The preliminary estimate for March is that real GDP was almost unchanged in the month.  Markets immediately interpreted the data as clearing the way for the Bank of Canada to deliver a rate cut at its next Council meeting on June 5.  That's probably still the correct call, but the picture is not quite as simple as the headline numbers (and the media) make it look. 

StatsCan estimates that real GDP growth for Q1 as a whole will probably come in at 0.6 percent quarter-over-quarter, or an annualized rate of about 2.5 percent. That's significantly stronger than the anemic 0.2 percent quarter-over-quarter growth rate reported for the final quarter of 2023.  It's also pretty much in line with most estimates of the economy's long-term potential growth rate. That suggests that if the economy is moving into a situation of excess supply, which would be disinflationary, it's doing so at a glacial pace. 

The slowdown in monthly growth from January to February and seemingly again from February to March may be significant, but it needs to be interpreted carefully.  The strong number posted for January was heavily influenced by the end of public sector strikes in Quebec.  The underlying pace of growth in the economy is probably somewhere between the February and March numbers, hardly a robust showing but not one that points unequivocally to an imminent recession. The February report would in fact have been higher but for a pullback in utilities output in the month, reflecting the unusually mild winter weather across most of the country this year.

Where does this report leave the policymakers at the Bank of Canada? The estimated quarterly figure is more or less in line with the Bank's most recent forecasts, and it is important to recall that the Bank expects GDP growth to accelerate as the year progresses. The latest inflation data showed an unwelcome uptick, which the Bank will not want to see repeated when the April figures are reported in mid-May. Lastly, there is increasing speculation that the Federal Reserve will not start reducing rates until September or even December, and the Bank will not want to untether Canadian rates too completely from those in the US, for fear of causing the exchange rate to weaken sharply. 

In short, it's still not an easy choice. Barring a very nasty inflation surprise, a 25 basis point rate cut in early June is still the likeliest outcome, but it now seems unlikely that the Bank will be able to follow up with further cuts at each of its meetings in the second half of the year.