Q4 GDP rises 1%, but won’t impact Bank of Canada rate hold
Penelope Graham, Director of Content
The latest batch of economic data – the final report before next week’s Bank of Canada announcement – is now in, and it offers optimism that Canada will indeed avoid a downturn, with rates poised to decrease later this year.
According to Statistics Canada, the country’s Gross Domestic Product (GDP) measure inched up by 1% in the fourth quarter of 2023, following Q3’s -0.5% decline. That means the economy has avoided two consecutive quarters of contraction, the official benchmark for a recession. The uptick is mostly thanks to an increase in exports, which rose 1.4%, though StatCan notes a decline in business investment offset that considerably.
Household spending – largely backed by the purchase of new large vehicles, such as trucks, vans, and SUVs – rose by 0.2%. However, it’s evident tougher interest rates and overall higher cost of borrowing are being keenly felt, with growth in spending down to 1.7% for the whole of 2023, compared to 5.1% the previous year.
High interest rates continue to impact housing investment and real estate
Higher borrowing costs also made a dent in the investment in new housing construction, which fell -0.4%, marking a sixth downturn over the last seven quarters. While activity in new construction rose 2.2%, along with a 0.2% increase in renovations, overall demand for real estate was considerably dampened, with “ownership transfer costs” down -7.7%.
Despite the overall stronger quarter, though, conditions were flat at year-end, with 0% growth recorded for December, marking an abrupt cut off to the increases recorded in November and October. That’s well below the 0.3% expected by StatCan’s estimate; however, it expects things to turn around imminently, calling for a 0.4% increase in January.
Q4 report won’t change the BoC’s rate hold plans
Overall, the GDP data won’t have an impact on the Bank of Canada’s rate announcement on March 6, in which it is largely anticipated to hold its trend-setting Overnight Lending Rate at 5% for a fifth consecutive time. Analysts point out that while fourth-quarter growth came in stronger than the expected 0.5%, the ongoing surge of new immigration to the country skews the picture.
“With population growth continuing to surge higher, the Q4 increase will mark a sixth consecutive drop on a per-capita basis,” writes Nathan Janzen, Assistant Chief Economist at Royal Bank of Canada.
January’s lower-than-anticipated inflation report, in which CPI came in at just 2.9% on an annual basis, has also strengthened expectations that the Bank will continue holding rates for the time being, with rate cuts possible by late spring or summer.
“The bottom still isn't falling out of the economy in a way that would push the Bank of Canada to shift quickly to looser monetary policy,” Janzen adds. “But with the economy continuing to show signs of softening, inflation is still likely to drift lower rather than higher. Our base-case assumption is that the BoC will shift to interest rate cuts in June.”
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Penelope Graham, Director of Content
Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.