Canadian economy reports unexpectedly strong results even amid sharp rate increases

Canadian economy continued to grow at the beginning of 2023 despite all the forecasts of a stall and future technical recession amid the highest interest rates in 15 years.

According to the preliminary data from Statistics Canada, GDP rose by 0.3% last month with the strongest gains in the sectors of oil and gas, manufacturing, and finance and insurance. The results followed a 0.5% increase seen in January, which was higher than the 0.4% gain expected by economists in a Bloomberg poll.

It means that Canada’s economy is now heading towards an annualized rate of 2.8% in the first quarter, in case March will show flat growth. It’s much more than the central bank’s January forecast of 0.5%. That was the moment it announced a pause in its rate-hiking cycle.

“The latest numbers exceed even the most optimistic views,” – Bank of Montreal Chief Economist Doug Porter noted. “If the strong performance we’ve experienced lately continues, the Bank of Canada will face a difficult decision.”

The report shows that although certain rate-sensitive segments, e.g. real estate, have already cooled, the overall economic growth keeps performing better than expected. It also doesn’t coincide with early estimates pointing to a possible slowdown in economic activity with sales drops in retail, wholesale and manufacturing sectors.

Friday’s numbers will be quite a challenge for Governor Tiff Macklem as the Bank is searching for evidence that monetary policy is strict enough to return inflation back to the 2% target. A number of stronger-than-expected results could force the Bank to stay on the sidelines for longer or even raise the rate again.

Meanwhile, traders believe that the BoC’s next move will be a rate cut, as global financial markets are facing difficulties after the failure of regional U.S. lenders and a government takeover of a European banking giant.

“The central bank is probably at a crucial juncture now,” – Charles St-Arnaud, chief economist at Credit Union Central Alberta Ltd., noted. “It has to choose between fighting inflation and raising rates again or focusing on financial stability and keeping rates unchanged.”