Amazing GDP growth makes it more difficult for the Bank of Canada to make its next rate decision

The beginning of 2021 shows stronger economic growth for Canada following drastic declines seen in 2020 caused by the pandemic.

According to Statistics Canada, gross domestic product was up by about 0.5% in January, while December reported only a 0.1% increase.

The largest gains of 2.9% were seen in the mining and energy sectors. At the same time, the retail, accommodation and food services industries faced one more month of contraction because of the restrictions designed to restrain the spread of COVID-19.

“In case January results are real, half a percentage gain is extremely strong for a monthly GDP in any circumstance,” – noted TD Securities Chief Canada Strategist Andrew Kelvin. “It means we’ll get through the second wave of COVID without a negative month of GDP, and it’s frankly stunning,”

Kelvin was not alone to get surprised by such great numbers. BMO Capital Markets Chief Economist Douglas Porter says the bank has increased its annual growth forecast by 1% to 6%.

It could be a strong contrast from 2020, when the economy contracted by 5.4%.

Such an update raised new questions on how Canada’s policymakers will react to it, especially amid the BoC’s forecast of a 2.9% drop in GDP during the first quarter of 2021.

In Kelvin’s opinion, the central bank will be in a difficult position when making its next rate decision on March 10.

“Yes, they need to admit the outlook is better than it was 6-8 weeks ago. They can’t just pretend nothing has changed”, – he noted.

“At the same time, they don’t want to add fuel to the fire that we’ve seen in bond markets where we began to re-price the Bank’s forecasts, as it leads to tighter financing conditions across Canada”.