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Real GDP Edges Up in February but is Noticeably Slower Than in January

Canadian Economics

By: Viktor Cicman

  • Real gross domestic product rose by 0.1 per cent in February, following a strong start in January of 0.6 per cent. According to Statistics Canada’s preliminary estimate, the economy will decrease by 0.1 per cent in March.
  • Among the goods-producing industries, output in construction increased for the fifth consecutive month, rising by 0.3 per cent. Residential building construction was the top contributor to growth. The manufacturing sector decreased slightly by 0.1 per cent, as non-durable goods manufacturing led the decline. The petroleum and coal product manufacturing subsector was a significant driver behind the fall, with lower demand due to milder temperatures around the world contributing to the decline.
  • Services-producing industries edged up 0.1 per cent, with four of eight sectors seeing growth. The professional, scientific, and technical services sector had one the largest increases among service producing sectors rising by 0.6 per cent in February. Computer systems design and related services continues to be among the top contributors to growth in the sector. Meanwhile, the public sector continued its streak of gains with 13 consecutive months, expanding by 0.2 per cent in February.
  • Wholesale and retail trade declined after posting strong gains in January. Lower demand for products was the main culprit. Motor vehicle and motor vehicle parts and accessories wholesalers dropped for the third consecutive month, down 4.4 per cent in February. The sector has reached its lowest level since June 2020.

Insights

During the first two months of the year, real output growth hasn’t slowed to the pace many economists were expecting. Consumer spending, while slowing, has still kept the economy afloat as high household savings and strong wage growth continue to be a factor despite the sharp rise in interest rates over the last year. However, things are beginning to turn as retail sales saw a 0.2 per cent decrease in February. In volume terms, retail sales decreased by 0.7 per cent. In addition, while the March labour force figures showed an overall increase in employment, it was led by sectors that still have not fully recovered from the pandemic. With consumer and business confidence stalling, we expect interest rates to slow the economy over the next few months but likely averting a major recession this year. 

Canada’s Central Bank will likely continue its pause on interest rate hikes in May. Inflation continues to fall as base-year effects come into play and business and consumer confidence wane. In addition, higher wage growth and persistent employment gains are an area of concern for the Bank. Still, the Bank is monitoring the effects of last month’s banking crisis south of the border and the impact of higher mortgage rates on the economy. Putting all these factors together, it seems the central bank may be able to orchestrate a soft landing. Of course, if the US Federal Reserve continues raising its short-term interest rates, it remains to be seen how long the Bank of Canada can maintain its policy stance without following suit.

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