Bank of Canada won’t be swayed by GDP surge, say economists

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The latest gross domestic product data indicates Canada’s economy is responding well to lower interest rates, but its revival could be snuffed out if the United States goes ahead with tariffs, economists warn.

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Canada’s economy appeared to be firing on many cylinders in the latter half of 2024 as the fourth quarter’s annualized GDP growth of 2.6 per cent beat analysts’ estimate of 1.7 per cent.

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Household spending was the main driver, Statistics Canada said.

On a monthly basis, GDP rose 0.2 per cent in December, missing the estimate of 0.3 per cent. Year-over-year GDP rose 2.2 per cent, stronger than the estimate of two per cent.

The agency also revised GDP growth for the third quarter to 2.2 per cent from one per cent.

“On a per-capita basis, real GDP rose 0.2 per cent in the fourth quarter, after falling 0.1 per cent in the previous quarter. In 2024, GDP per capita fell 1.4 per cent, following a decline of 1.3 per cent in 2023,” Statistics Canada said in its release.

Many economists have said the per-capita metric shows Canada would have been in a recession if it weren’t for the steep rise in the country’s population over the past few years.

Here’s what the GDP numbers mean for the Bank of Canada and interest rates.

‘Sparks of life’: CIBC

“Canada’s economy showed some evident sparks of life in the final quarter of 2024 as it responded to lower interest rates and a sales tax holiday, but that flame could still be extinguished in 2025 if the country faces a tariff wall,” Avery Shenfeld, chief economist at CIBC Capital Markets, said in a note.

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As a result, he said the market’s reaction to the upbeat report will remain muted.

In normal times, this report would give the Bank of Canada permission to pause rate cuts, but these aren’t normal times.

Shenfeld forecast that the first quarter of 2025 could come in weaker as the threat of tariffs stalls companies’ spending plans.

“A trade war could easily snuff out growth should Canada be hit with broad and significant tariffs,” he said. “That risk could dull market reactions to what was otherwise a better-than-expected report, and will have the central bank still mulling over a March rate cut if the tariff news goes the wrong way.”

‘Won’t sway Bank of Canada’: TD

“Today’s report seems to be telling a story of what could have been for the Canadian economy,” James Orlando, director and senior economist at TD Economics, said in a note.

Consumers were the “driving force” in the country’s growth, he said, by buying cars, trucks and SUVs and dining out, likely encouraged to spend by lower interest rates and the GST/HST tax break.

Orlando said increased exports to the U.S., which also drove GDP growth, were likely due to companies trying to get ahead of tariffs.

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Business investment rose in the quarter, but he doesn’t expect it to carry over “given the souring of business sentiment in Canada.”

“Today’s GDP release isn’t going to sway the (Bank of Canada),” he said.

Orlando thinks the Bank of Canada won’t be looking backward to last year, but forward to the threats facing the economy, with huge “downside risks” looming.

Currently, markets are pricing a 50-50 chance that the Bank of Canada will cut rates on March 12, its next announcement.

“This feels right, as the (Bank of Canada) could go either way,” he said. “No one would complain if the (Bank of Canada) took out more insurance against the downside risks with another 25 (basis point) cut, while a hold could also be justified should the bank prefer to take a wait-and-see approach.”

‘Consumer main driver’: Capital Economics

“The consumer continues to be the main driver of growth,” Bradley Saunders, North America economist at Capital Economics Ltd., said in a note, as household consumption rose 5.6 per cent in the fourth quarter.

He also highlighted significant growth in business investment, non-residential construction and exports.

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“The upward revisions to previous quarters’ data were broad-based, with rate-sensitive areas seeing the largest rises,” he said, noting that the final data for last year means GDP growth in 2024 was 1.5 per cent, which was “much stronger than the 1.2 per cent we had forecast.”

Given the strength of the GDP data and signs of a firm handoff to start 2025, Saunders thinks the Bank of Canada will hold on rates if Trump fails to pull the tariff trigger on March 4.

That’s a switch from Capital Economics’s call for an interest rate cut on March 12.

• Email: gmvsuhanic@postmedia.com

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