Canada's economy is losing momentum — quickly

The Canadian economy lost momentum in February as it grew at a slower pace than both analyst expectations and Statistics Canada's previous prediction, increasing the pressure on the Bank of Canada for a potential interest rate cut in mid-2024.

Real gross domestic product (GDP), which measures the value of goods and services for a specific time frame, edged up 0.2 per cent in February, after a 0.5 per cent gain in January, primarily due to growth in the transportation and warehousing  sectors.

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The growth was lower than the government agency's previous estimate — made in March — of 0.4 per cent, and analyst expectations of 0.3 per cent.

Statistics Canada predicted unchanged growth for March in its advanced estimate. Overall, the agency expects the economy to have grown by 0.6 per cent in the first quarter, though the actual figure will not be available until the end of May.

"While Q1 looks like it was decent overall, the loss of momentum as the quarter progressed is the bigger takeaway from this report," Benjamin Reitzes, managing director at BMO Capital Markets, said in a note on Tuesday.

"That puts additional pressure on the Bank of Canada to begin cutting as soon as June (which is still dependent on the consumer price index in a few weeks). Unfortunately, persistently strong U.S. data is making things increasingly complicated for the bank, as it appears that the Fed could be on hold for a while."

In April, the Bank of Canada announced its sixth consecutive hold on interest rates since the last increase in July 2023. But as the economy slows due to high interest rates, many economists expect the bank to announce its first cut in either June or July. The central bank's next meeting is on June 5.

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A 5.5 per cent increase in rail transportation in February after January's cold snap in Western Canada and a 4.8 per cent growth in air transportation, which was driven by increased flight capacity to Asia, contributed to the overall increase of 1.4 per cent in the transportation and warehousing segment that Statistics Canada measures.

The resource extraction sector increased 2.5 per cent in February following a decline of 2.3 per cent in January, with oil and gas up 4.4 per cent, oilsands up 2.1 per cent and mining up 1.9 per cent.

Gold and silver ore mining was up for the third month in a row, rising 4.4 per cent as multiple gold mines increased production, coinciding with an all-time high in exports of gold amid a record price for the metal.

The manufacturing sector fell by 0.4 per cent in February due to declines in transportation equipment, with motor vehicle and parts manufacturing being the largest contributor, and chemical products.

"Today's GDP report confirmed our expectations that the January surge in output was temporary," Royal Bank of Canada economist Claire Fan said in a note on Tuesday.

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As a result of the new report and an increasingly soft labour market, she expects the Bank of Canada to make its first cut in June.

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CIBC Capital Markets economist Andrew Grantham said that if inflation doesn't heat up again in April, the bank should start reducing interest rates in June.

"Momentum in the Canadian economy seems to have faded quickly," he said.

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