The Canadian economy expanded 0.2% in January. Analysts at CIBC point out first-quarter GDP is now tracking roughly 4% annualized growth, well above “what most people had expected at the start of the year and higher than the Bank of Canada's January MPR forecast of 2%.” According to them, the figures provide further ammunition for rate hikes.
Key Quotes:
“The Canadian economy certainly faired much better in Q1 than we had previously expected, and as a result we will be raising our forecast to around 4% annualized for the quarter. However, the impact of high inflation on household finances, potential supply chain issues in manufacturing stemming from Russia/Ukraine and China, and higher interest rates finally slowing the housing market, will mean that growth throughout the remainder of the year is slower than we had initially assumed. Because of that, our forecast for GDP growth in 2022 as a whole (roughly 3 1/2%) will be little changed.”
“The strong start to the year provides justification not just for further hikes, but potentially a 50bp move in April. That could mean a year-end rate that is 25bp above our current 1.5% forecast. However, with growth likely to slow in the second half of the year and inflation starting to decelerate, we still think that the path higher for interest rates won’t be as steep as financial markets are currently expecting, and we still see a peak of 2.25% in 2023.”
“While today's data, particularly the advance estimate for February, were better than expected and will lead to upward revisions in terms of Q1 growth, market reaction was very limited. That likely reflects the fact that the market is already pricing in a very quick tightening cycle from the Bank of Canada (to a 2.5% overnight rate by year-end) making it more susceptible to downside surprise rather than upside ones.”