The Canadian economy recorded no growth in the final three months of 2022, surprising Bay Street, where the average forecast had called for a 1.5% expansion. The reading was also well below the Bank of Canada’s forecast for 1.3% annualized GDP growth in the quarter.
The monthly numbers were also weak. The economy contracted 0.1% in December from November, below Street expectations that GDP would be unchanged in the month.
Quarterly GDP was impacted by slower inventory accumulations and declines in business investment in machinery and equipment as well as housing, Statscan said. That offset higher household and government spending and improved net trade.
Statistics Canada, however, believes the economy likely started 2023 on a stronger footing, predicting growth of 0.3% in January.
The report contributed to weakness in the Canadian dollar Tuesday, which by mid-afternoon was down more than a quarter cent against the greenback than prior to the 830 am ET data release. Shorter-term Canadian bond yields were also slightly softer relative to their U.S. counterparts.
Yet, the weaker-than-expected data had minimal impact on where credit markets are placing their bets on further moves in the Bank of Canada overnight rate. Based on trading in swaps markets, implied bets suggest a more than 95% probability of no change to the overnight rate at the bank’s March 8 announcement - a few percentage points higher than before the data.
But the market is still pricing in strong odds of another quarter-point hike in the overnight rate by this fall. And rate cuts by the bank are still not expected this year based on market positioning.
Here’s how money markets are pricing in further moves in the Bank of Canada overnight rate for this year as of 1045 am ET, according to data from Refinitiv Eikon. The current Bank of Canada overnight rate is 4.5%. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing.
Here’s how economists and market strategists are reacting:
ROYCE MEDNES, MANAGING DIRECTOR AND HEAD OF MACRO STRATEGY, DESJARDINS SECURITIES
Don’t judge this GDP release by its cover - or in this case the headline print. ... After stripping out inventories and international trade, final domestic demand - a better gauge of underlying economic momentum in Canada - rose 1.0% after declining 0.6% in Q3. That was only slightly below our forecast and reveals that the headline miss was a story of volatile inventories and a drag from international trade. The weakness in inventories comes after record accumulation in Q2 and Q3 2022.
The latest readings on Canadian GDP will allow the Bank of Canada to defend its pause next week with credible evidence that inflation and the economy are slowing. However, the data won’t be enough to see rate hike bets for later in the year evaporate just yet. Government of Canada bond yields are slightly lower following the release.
ANDREW GRANTHAM, SENIOR ECONOMIST, CIBC CAPITAL MARKETS
The stall in GDP during the final quarter of last year was a surprise, but a rebound in domestic demand led by consumer spending shows that the bottom is certainly not falling out of the economy. The advance estimate for January points to a rebound in growth during the first quarter, albeit not to the sort of pace that will add to inflationary pressure or concern the Bank of Canada. Indeed, Q4 and the early tracking for Q1 combined suggest that the economy is now growing below its long-run potential, which should help to further ease inflationary pressures.
Following recent upside surprises in employment reading, markets appear to have been anticipating another positive surprise today. The weaker-than-anticipated result saw bond yields decline and the Canadian dollar weaken against the US$, albeit fairly modestly.
DEREK HOLT, VICE PRESIDENT OF CAPITAL MARKETS ECONOMICS AT SCOTIABANK
Generally speaking, I think the underlying details are better than the headline suggests, because so much of the headline, Q4 weakness was driven by very large drags from inventories and imports... I think the way the Bank of Canada would look at it would be more in terms of the final domestic demand definition... You’ve got consumption up 2%, and that added 1.1 percentage points to overall growth. So I think that the Q4 numbers are better under the hood than on the headline, and we have some momentum into Q1 with the three-tenths preliminary guidance for January. ...
[For the Bank of Canada] March is a done deal. It’ll be a short and sweet statement saying that they’re still on a conditional hold and evaluating the lagging effects. I wouldn’t expect anything out of that one. I think it’ll be a repeat of the messages they’ve delivered so far. But some of the indicators are going in multiple directions and so the Bank of Canada will remain cautious evaluating the data after this meeting... Today there are more positives than negatives on balance. We’ve got incredibly strong job markets, consumption is holding up, the GDP is better in the details and it’s just a very distorted headline. They’ll want to see a whole lot more data before they’re convinced that they’re either done and/or that they’re going to act again.
ROBERT BOTH, MACRO STRATEGIST, TD SECURITIES
It is a pretty large miss on Q4. I think that has to give the BoC just a little bit of comfort that higher interest rates are working to slow demand, especially with the conflicting signals from the labor market over the last couple of months. And as far as January was quite strong at 0.3% month-over-month, I think they do have a lot more scope to look past that after a large miss on Q4.
DOUGLAS PORTER, CHIEF ECONOMIST, BMO CAPITAL MARKETS
Today’s mostly soft report won’t be a disappointment to policymakers, as the Bank of Canada is openly attempting to take some steam out of the economy. And zero-point-zero growth is about as little steam as one could ask for, without pushing things into an outright downturn. The late-year softness was compounded by weak oil and auto production, and growth looks to have firmed a touch at the start of 2023. Growth will need to hold below potential (about 2%) to dampen excess demand and reduce inflation pressures. Today’s result simply reaffirms that the BoC will be on hold at next week’s decision, and if growth remains below potential—as we expect—they will likely stay on the sidelines. The key for the Bank will be whether the bounce in January GDP was the start of a trend, or a one-off weather-related fluke; we suspect it’s mostly the latter.
STEPHEN BROWN, DEPUTY CHIEF NORTH AMERICA ECONOMIST
The stagnation in fourth-quarter GDP, together with the downward revision to third-quarter GDP growth, leaves the economy in worse shape than the Bank of Canada expected. That is another reason to think that, even though the US Fed is still hiking, the Bank will be content with leaving policy unchanged. ...
Even if GDP edged down in February and March, the strong gain in January implies that first-quarter growth would still be marginally positive. Nevertheless, with the leading indicators looking weak, we continue to see a strong risk that GDP will decline over the second and third quarters.
With a report from Reuters