Canada’s economy misses February growth forecasts; Q1 GDP up 2.5%

Canada’s gross domestic product increased by 0.2 per cent in February, less than market expectations, and the economy likely expanded at a 2.5 per cent annualised rate in the first quarter, data showed.

Analysts polled by Reuters had forecast a 0.3 per cent GDP growth in the month. January’s growth was downwardly revised to 0.5 per cent from 0.6 per cent reported initially.

In a preliminary estimate for March, Statistics Canada said GDP was likely unchanged from February as increases in utilities as well as real estate, rental and leasing were offset by decreases in manufacturing and retail trade.

With the January revision and the March estimate, the 2.5 per cent estimated growth in the first quarter would be the fastest growth rate since the first quarter on 2023.

Monthly GDP report is based on Canada’s industrial output while quarterly figures, which will be released next month, are based on an alternate calculation and can differ.

The data from Statistics Canada bolstering expectations that the Canadian central bank would have more reason to cut interest rates in June.

The loss of economic momentum into the quarter “puts additional pressure on the BoC to begin cutting as soon as June,” said Benjamin Reitzes, managing director and Canadian rates and macro strategist at BMO Capital Markets.

Analysts polled by Reuters had forecast 0.3 per cent GDP growth in the month.

In a preliminary estimate for March, Statscan said GDP was likely unchanged from February as increases in the utilities and real estate, rental and leasing categories were offset by decreases in manufacturing and retail trade.

Growth in January was downwardly revised to 0.5 per cent from 0.6 per cent, it said, and considering March estimates, the economy is likely to have expanded at a 2.5 per cent annualised rate in the first quarter, the fastest growth rate since the first quarter of 2023. The monthly GDP report is based on Canada’s industrial output while quarterly figures, which will be released next month, are based on an alternate calculation.

The BoC expects growth in the first quarter of 2.8 per cent and 1.5 per cent in the second quarter, it had said in its last monetary policy report earlier this month.

Economic growth stalled in the second half of last year and the rebound in January had eased pressure on the central bank to lower rates to avoid a downturn. The chances of a first rate cut happening any time soon were further complicated by strong US data, which has pushed chances of a rate cut by the Federal Reserve deep into the second half.

“We continue to see the Bank of Canada beginning a rate cutting cycle in June,” Royce Mendes, head of macro strategy for Desjardins Group, wrote in a note. Traders and economists had expected Canada’s GDP to weaken as January’s rebound was largely driven by one-off factors.

Money markets slightly increased the odds of a rate cut in June to close to 60 per cent from 56 per cent before the release of the data, while a cut in July is fully priced in.