GDP coming short of expectations might be a sign of upcoming rate cuts

In the first quarter, Canada’s economy expanded at a rate of 1.7%, which was lower than expected. This growth was accompanied by a sixth consecutive decline in per-capita GDP over the past seven quarters. As a result, the Bank of Canada now has the opportunity to begin lowering interest rates.

Statistics Canada released data on Friday, revealing that quarterly growth fell short of analysts’ predictions, coming in at 1.7% instead of the expected 2.2%. Additionally, GDP growth for Q4 was revised downward from the initial 1.0% reported to an annualized rate of 0.1%.

Despite the sluggish first quarter, it removes the last potential barrier preventing the Bank of Canada from lowering interest rates. It can give way to a rate cut announcement in the Bank’s June 5 statement.

While the economic data hasn’t sharply deteriorated, there are concerning signs. Per-capita output remains at 2016 levels (with little change from a decade ago), the unemployment rate has increased by one percent compared to last year, and the BoC’s preferred inflation measures show month-over-month increases below the central bank’s 2% inflation target.

In summary, it seems the Bank of Canada has little reason to delay initiating at least a gradual easing cycle, and a 25-basis-point cut to the overnight rate is likely next week.

Additionally, domestic spending by Canadian consumers, businesses, and governments increased by 2.9% in the first quarter. Consumer spending, driven by higher expenditures on services, contributed to this growth. Household disposable incomes rose by 7.4%, while business investment increased by 3.5%. Consumers also recorded a higher saving rate compared to the previous quarter.

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