Canada’s economy unexpectedly slowed in Q4, supporting the rate cutting by the year end
On Tuesday, Statistics Canada said the Canadian economy ended 2022 with a deeper slowdown than anticipated amid higher interest rates but appears to have gained momentum at the start of the new year.
The report shows real gross domestic product was unchanged in the fourth quarter of 2022 after five consecutive quarters of growth, and a much grimmer economay than forecasters were expecting as higher interest rates took a more noticeable toll on the economy.
Statistics Canada’s preliminary estimate had predicted 1.6 per cent annualized growth for the quarter.
The economic slowdown in the last three months of the year came despite higher household and government spending as well as a stronger trade position for Canada.
After two quarters of record inventories, businesses accumulated less inventories in the fourth quarter, weighing significantly on real GDP growth.
Real business investment also declined for a third consecutive quarter as higher interest rates weakened housing investment in 2022.
In December, the economy contracted by 0.1 per cent as goods-producing industries declined.
But the report includes some silver linings for Canadians. After declining by 0.1 per cent in the third quarter, household spending bounced back by 0.5 per cent in the fourth quarter. Household disposable incomes also rose faster than their nominal spending, allowing them to save more money.
The federal agency says the household savings rate was six per cent in the fourth quarter, up from five per cent the previous quarter.
The report partly attributes this improvement in household finances to government benefits, including the one-time top-up to the GST tax credit and a 10 per cent increase in Old Age Security payments for seniors aged 75 years and over.
The Liberal government introduced these measures targeted at lower-income Canadians to help them cope with higher inflation.
A preliminary estimate from Statistics Canada suggests the economy bounced back in January, posting 0.3 per cent growth in real GDP.
Last month, the economy added 150,000 jobs, suggesting there’s still steam on the hiring front.
Since March, the Bank of Canada has raised its key interest rates from near-zero to 4.5 per cent, the highest it’s been since 2007.
The central bank contends a slowdown is necessary to bring inflation back down to its two per cent target.
After peaking at 8.1 per cent in the summer, Canada’s annual inflation rate slowed to 5.9 per cent in January. Hope is on the horizon for Canadians.
The Bank of Canada is forecasting inflation will slow to three per cent by mid-2023 and fall back to the two per cent target next year.
It’s hoping inflation can come back down to target without a sharp economic downturn. At the same time, the central bank has stressed that returning to normal price growth is its primary focus, one that could come at the expense of a more severe economic contraction.
A number of financial experts and institutions also expect inflation to ease over the course of 2023, spurring the Bank of Canada (BoC) to cut interest rates by year-end.
In the beginning of February, the BoC published the results of its Market Participants Survey. Conducted in Q4 2022, the results are based on responses from roughly 30 financial market participants, including senior economists and strategists at banks, pension funds, asset management firms, and insurance companies.
The median response from participants was an expectation that the Bank will cut interest rates by 25 basis points in October and again in December, bringing the policy rate down to 4% by the end of 2023.
Jean-François Perrault, Senior Vice-President and Chief Economist at Scotiabank, took a more reserved stance in an economic forecast predicting a 25-basis-point cut by year-end.
In contrast, Rennie Intelligence provided a more positive prediction. A recent report from the Vancouver-based market insight group forecasts an initial 25-basis-point cut in the summer, followed by two additional cuts in the fall, bringing the year-end policy rate to 3.75%. It also predicts that headline inflation will fall “substantially” in 2023 – down to 3.1% by April, and reaching the target range shortly thereafter.
While Scotiabank remains of the view that Canada will experience a “very mild” recession, it forecasts real GDP growth of 1.1% for 2023 — the median response to the BoC’s survey predict an annual decline of 0.4% — and a 0.6% increase in the unemployment rate.
Part of the article was reported by BNN Bloomberg.