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Real GDP Continues Growing in January

Canadian Economics

By: Viktor Cicman

  • Real gross domestic product (GDP) grew by 0.6 per cent in January. This was a surprisingly healthy increase, but most of the growth was led by a rebound in educational services. Impressively, the economy did see broad-based growth as 18 out of 20 industries posted an increase. Advance information indicates that real GDP rose 0.4 per cent in February, showing broad-based increases again.
  • Goods producing sectors grew by 0.2 per cent in January, led by utilities and manufacturing. The manufacturing sector grew by 0.9 per cent in January, fully recovering December’s output drop. Durable goods manufacturing led growth, after four consecutive months of decline, as motor vehicle manufacturing industry increased 4.9 per cent in January.
  • Service producing sectors recorded an impressive 0.7 per cent rise in January, led by a strong recovery of 1.9 per cent in the public sector. The educational services sector increased by 6.0 per cent, but can mostly be attributed as a recovery from the public sector worker’s strike in Quebec.In addition, the health care and social assistance sector, also saw impressive growth of 0.8 per cent in January as it was also impacted by Quebec’s public sector workers’ strike.
  • Mining, quarrying and oil and gas extraction sector decreased for the first time in four months. Oil and gas extraction dropped 4.4 per cent in January, after reaching a record high level the month prior. The reason for the decline was cold weather bringing about production issues in January. Mining and quarrying (except oil and gas) also declined 0.7 per cent in January. Most of the sector’s declines though are from temporary factors, as advanced estimates show the sector will likely lead growth next month.
  • Real estate and rental and leasing, grew for the third consecutive month, rising by 0.4 per cent in January. Most of the growth came from higher activity in the Greater Toronto Area, Hamilton–Burlington and most markets in Ontario’s Greater Golden Horseshoe. With mortgage rates peaking it seems home buyers are beginning to enter the housing market again.
  • Information and cultural services grew for the third consecutive month, this time by 1.0 per cent, which is the largest growth rate since August 2021. However,this sector is also impacted by a recovery from a strike. The motion picture and sound recording sub-sector saw the largest increase, as activity continued to rise following the end of the Screen Actors Guild strike in November.

Insights

While January and February’s GDP estimates create a solid base for economic growth this year, much of the increase in January comes about from a post-strike rebound in the public sector. High interest rates and persistent inflation continue to take its toll on the economy, weighing down disposable income and prompting consumers to curb spending. However, rapid population growth remains a significant growth driver amidst the slowdown. However, the labour market is now showing signs of struggling to absorb the new workers, made evident by an increasing unemployment rate.

The good news is that Canada’s overall inflation rate decreased in February, with the latest headline number rising by 2.8 per cent, down from 2.9 per cent in January. The closely watched core inflation measures also eased to two-year lows. Rent and mortgage interest costs continued to be primary drivers of the inflation rate. However, despite the decline in inflation, concerns persist as service inflation, inflation expectations, and wages remained uncomfortably high in February. Nonetheless, with continued positive inflation data anticipated in the coming months, it appears increasingly likely that the Bank of Canada will cut rates in June, providing a boost to the economy as heightened economic activity is expected by year-end.

Looking to the south of the border, consumer price growth in the United States has shown an opposite trend. In February, the year-over-year Consumer Price Index climbed to 3.2 per cent from 3.1 per cent in January. In fact, for the past nine months, the annual rate of inflation has held between 3 and 4 per cent. Consumer spending has been resilient, which has had a positive impact on exports in Canada. In addition, with diverging inflation data, the Canadian dollar has depreciated relative to the US dollar. While a weaker Canadian dollar can fuel inflation as import prices rise, it also bolsters exports and the tourism sector. Ultimately, the US Federal Reserve is anticipated to lower its overnight rate in due course, although many businesses will continue to monitor developments in the US, given its status as Canada’s largest trading partner.

To learn more about Canada’s economic outlooks for the long-term or the next five year’s, please consult our Canadian Outlook.

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