Canada GDP clears the way for a rate cut

Canada's GDP data for Q1/2024 appear to leave the way open for the Bank of Canada to deliver a rate cut on June 5. According to Statistics Canada, real GDP grew at a 1.7 percent annualized rate in the quarter, marginally below analyst expectations. Growth for the final quarter of 2023, initially reported as a small  gain, was revised downward to flat.

Details of the report suggest that key segments of the economy continue to show solid growth. Most notably, household spending grew 0.8 percent in the quarter, or over 3 percent at an annualized rate, led by spending on services. This allowed per capita household spending to eke out a 0.1 percent gain, after three quarters of decline. The household savings rate of 7.0 percent was the highest since Q2/2022, suggesting that households will be able to maintain expenditure levels in the near term.

Business capital spending and residential investment also posted gains in the quarter. The main factor that served to keep overall GDP below expectations was a significant slowdown in inventory accumulation. This is generally a volatile component of the report and it is unlikely to represent the start of a new trend.

Alongside the quarterly data, StatsCan also reported monthly GDP figures for March.monthly GDP figures for March. GDP was flat in the month after rising 0.2 percent in February. Of the 20 sectors tracked by StatsCan, 11 posted higher output in the month, with notable gains in construction and the public sector. However, manufacturing output fell 0.8 per cent, mainly as a result of retooling shutdowns. Preliminary data for April suggest GDP grew by 0.3 percent in the month, with broad-based gains.

Today's report is the last major piece of data that the Bank of Canada will see before next week's rate decision, although it is possible the Bank will get a sneak peek at May employment data, which are due for release on June 7.  A 25 basis point rate cut next week may still be a close call, but seems the most probable outcome. However, the Bank will likely stress that it will maintain a cautious approach in the months ahead, with a total of 75 basis points of easing by the end of this year.